Don’t Privatize ISC

My op-ed in today’s Saskatoon StarPhoenix (page A11):

Privatizing ISC is a poor deal for Saskatchewan

The provincial government estimates that selling 60 per cent of the Information Services Corporation will raise up to $120 million for infrastructure investment. Is that a good deal for the people of Saskatchewan?

Last year, ISC generated $20 million of profit for the provincial treasury. Losing 60 per cent of this profit, $12 million, every year is a very costly way to get $120 million of one-time cash. That deal would be equivalent to borrowing in perpetuity at an interest rate of 10 per cent.

If the shares of ISC were to fetch less than $120 million, this rate would be even higher. By comparison, the Saskatchewan government could finance infrastructure at an interest rate of three per cent by issuing provincial bonds.

Don McMorris, the minister responsible for privatizing ISC, suggests that corporate taxes change this equation. On April 16, he told the legislative assembly: “The government will retain about 40 per cent of the shares of ISC … not to mention the corporate tax that the other 60 per cent will be paying back into the coffers of the province of Saskatchewan” (Hansard, page 3231).

But most corporate tax is paid to Ottawa rather than to the provincial treasury. The Saskatchewan government is promising to cut the provincial corporate tax rate to 10 per cent, compared to a federal rate of 15 per cent.

As a Crown corporation, ISC is exempt from both taxes. A privatized ISC with $20 million of profit would pay $2 million of provincial corporate tax and $3 million of federal corporate tax, leaving after-tax profits of $15 million. Of that, 60 per cent, or $9 million, would go to private shareholders.

Between that and federal corporate tax, Saskatchewan would lose $12 million of annual revenue.

Taking account of corporate tax does not make privatization more attractive. While provincial corporate tax does recoup some revenue from private shareholders, federal corporate tax collects revenue that would otherwise have gone to the province. One reason to maintain provincial Crown corporations is to continue their exemption from federal corporate tax.

McMorris also argues that privatization will increase ISC profits, by enabling it to expand outside the province. But we cannot assume that provincial corporate tax on these additional profits will be paid back to Saskatchewan’s treasury.

The Canada Revenue Agency divides a corporation’s taxable profits between provinces based on the location of its sales and payrolls. If a privatized ISC began making sales and hiring employees in other provinces, a corresponding proportion of its total profits would be taxed by those provinces rather than by Saskatchewan.

If there are good business opportunities for ISC in other jurisdictions, why not have it pursue those opportunities as a Crown corporation? Since 2008, the provincial government’s “Saskatchewan First” policy has prevented Crown corporations from investing outside the province.

However, the government recently backed away from this misguided policy. As columnist Murray Mandryk noted in Crown profits affect gov’t view (SP, April 26): “SGI Minister Donna Harpauer has told reporters that there’s absolutely no interest in unloading out-of-province ventures such as Coachman (Insurance) because they defray losses during bad claims years in Saskatchewan.”

If the government now accepts out-of-province investment by Crown corporations, privatization should not be a precondition for ISC to pursue business opportunities outside Saskatchewan. Inside Saskatchewan, privatization would unnecessarily hand control of crucial public records to private operators.

To mitigate this risk, the government will transfer Saskatchewan’s Vital Statistics Registry from ISC to eHealth Saskatchewan. The corporation’s annual report indicates that this registry accounts for less than three per cent of ISC revenues, but does not break out its cost. If the registry costs more than it brings in, Saskatchewan taxpayers will be on the hook for the difference after privatization.

Privatization does not make sense as a means either of financing provincial infrastructure or of expanding ISC outside the province. It also entails risks that are harder to quantify.

The people of Saskatchewan would be best served by maintaining ISC as a Crown corporation.

– Weir is an economist with the United Steelworkers union’s national office. He was a Saskatchewan NDP leadership candidate.