Main menu:

History of RPE Thought

Posts by Tag

RSS New from the CCPA

  • A critical look at BC’s new tax breaks and subsidies for LNG May 7, 2019
    The BC government has offered much more to the LNG industry than the previous government. Read the report by senior economist Marc Lee.  
    Canadian Centre for Policy Alternatives
  • The 2019 living wage for Metro Vancouver April 30, 2019
    The 2019 living wage for Metro Vancouver is $19.50/hour. This is the amount needed for a family of four with each of two parents working full-time at this hourly rate to pay for necessities, support the healthy development of their children, escape severe financial stress and participate in the social, civic and cultural lives of […]
    Canadian Centre for Policy Alternatives
  • Time to regulate gas prices in BC and stop industry gouging April 29, 2019
    Drivers in Metro Vancouver are reeling from record high gas prices, and many commentators are blaming taxes. But it’s not taxes causing pain at the pump — it’s industry gouging. Our latest research shows that gas prices have gone up by 55 cents per litre since 2016 — and the vast majority of that increase […]
    Canadian Centre for Policy Alternatives
  • CCPA welcomes Randy Robinson as new Ontario Director March 27, 2019
    The Canadian Centre for Policy Alternatives is pleased to announce the appointment of Randy Robinson as the new Director of our Ontario Office.  Randy’s areas of expertise include public sector finance, the gendered rise of precarious work, neoliberalism, and labour rights. He has extensive experience in communications and research, and has been engaged in Ontario’s […]
    Canadian Centre for Policy Alternatives
  • 2019 Federal Budget Analysis February 27, 2019
    Watch this space for response and analysis of the federal budget from CCPA staff and our Alternative Federal Budget partners. More information will be added as it is available. Commentary and Analysis  Aim high, spend low: Federal budget 2019 by David MacDonald (CCPA) Budget 2019 fiddles while climate crisis looms by Hadrian Mertins-Kirkwood (CCPA) Budget hints at priorities for upcoming […]
    Canadian Centre for Policy Alternatives
Progressive Bloggers

Meta

Recent Blog Posts

Posts by Author

Recent Blog Comments

The Progressive Economics Forum

Potash: The Folly of Privatization

I have the following op-ed in today’s Regina Leader-Post. Below it is a table supporting my statement that “the mines that PCS owned in 1989 still account for 80 per cent of its potash production and capacity.”

Privatizing Potash was a Costly Mistake

The greatest tragedy in BHP Billiton’s $38.6-billion (U.S.) bid for the Potash Corporation of Saskatchewan (PCS) is that the Government of Saskatchewan previously sold PCS for just $630 million. This privatization was the worst fiscal decision in the province’s history and has been aggravated by subsequent royalty giveaways to private potash companies.

PCS was created in 1975 as a provincial Crown corporation. The Saskatchewan government privatized it in 1989, selling all of its shares by 1994.

Presumably, the proceeds were deducted from the provincial deficit. Borrowing $630 million at 10 per cent interest, compounded over two decades, would have added $4.2 billion of provincial debt by now.

In fact, provincial bond rates have fallen far below 10 per cent since the early 1990s. Also, had PCS shares not been sold, dividend payments to the government would have partly offset interest charges on its additional borrowing. Therefore, $4.2 billion is a very optimistic estimate of privatization’s fiscal benefit.

The fiscal cost of privatization is the amount that PCS would be worth had it remained a Crown corporation. Since privatization, PCS has acquired additional potash mines in Saskatchewan and New Brunswick, phosphate and nitrogen facilities in the U.S. and Trinidad, and shares in other fertilizer companies.

During the 1990s, Crown corporations were encouraged to invest outside the province. Therefore, PCS could have made the same acquisitions and developed along the same lines had it remained a Crown corporation. If so, the fiscal cost of privatization is at least $40 billion (the Canadian-dollar value of BHP’s offer), which is about 10 times the maximum fiscal benefit.

Of course, privatization supporters would claim that PCS has been better managed as a private company. Had it remained a Crown corporation, PCS might have lacked the initiative or financial ability to expand.

However, the mines that PCS owned in 1989 still account for 80 per cent of its potash production and capacity. Since 70 per cent of the company’s current gross margin is from potash (rather than phosphate and nitrogen), these mines still provide at least 55 per cent of overall profits today.

If PCS had simply held onto those historic assets, it would now be worth more than half of today’s value. Even assuming that PCS would have completely stagnated as a Crown corporation after 1989, the fiscal cost of privatization was still more than five times the maximum fiscal benefit.

Depending upon which assumptions one accepts, the costs of privatization exceeded the benefits by between $18 billion and $36 billion. In other words, the Saskatchewan government gave up between $17,000 and $35,000 for every man, woman and child in the province.

Saskatchewan’s potash reserves still belong to the public. Unfortunately, the provincial government has been slashing the royalties charged to PCS and other companies that mine these reserves. Saskatchewan’s misguided royalty holidays on increased potash production in 2003 and 2005 simply prompted the U.S. and New Brunswick to cut their potash royalties.

This race to the bottom has robbed Saskatchewan residents of an appropriate return on their resource. The potash industry extracted the same tonnage from Saskatchewan in 2005 and 2008. Entirely due to price increases, this output was worth $4.7 billion more in 2008 than in 2005.

Most of this gain should have accrued to the people of Saskatchewan, who own the resource. Yet provincial potash royalties rose by only $1.1 billion between the 2005 and 2008 fiscal years.

The provincial government then refunded much of this money to PCS and other potash companies following the economic crisis. As a result, royalty revenues actually turned negative in the 2009 fiscal year, even though the dollar value of potash sold from Saskatchewan remained higher than it had been in any year before 2007.

Of course, profits in excess of royalties are subject to corporate income tax. However, the Canadian government is slashing its corporate tax rate from 29 per cent in 2000 to just 15 per cent by 2012.

Between 2006 and 2008, Saskatchewan cut its rate from 17 to 12 per cent. Wholly or partially reversing these corporate tax breaks would give the public a more significant fraction of future potash profits.

The prospect of a PCS takeover underscores the folly of having privatized Saskatchewan’s crown jewel. Whether or not a takeover occurs, governments should strengthen their royalty and tax regimes to collect a fairer share of potash revenue for the public.

Erin Weir is a Saskatchewan expatriate working at the Canadian National Office of the United Steelworkers union, which represents most of Saskatchewan’s potash miners.

PCS Potash Mines (millions of KCl tons)

 

Mines

 

 

Capacity

 

 

Production

 

 

Pre-1989

 

 

Nameplate

 

 

Operational

 

 

2009

 

 

2008

 

 

Lanigan

 

 

3.8

 

 

3.6

 

 

0.7

 

 

2.1

 

 

Rocanville

 

 

3.0

 

 

2.8

 

 

0.9

 

 

2.8

 

 

Cory

 

 

1.4

 

 

0.8

 

 

0.4

 

 

0.4

 

 

Esterhazy*

 

 

1.3

 

 

0.9

 

 

0.3

 

 

1.1

 

 

60% Allan

 

 

1.1

 

 

1.1

 

 

0.4

 

 

0.7

 

 

Sub-Total

 

 

10.7

 

 

9.2

 

 

2.8

 

 

7.2

 

 

Post-1989

 

 

40% Allan

 

 

0.8

 

 

0.7

 

 

0.3

 

 

0.4

 

 

Patience L.

 

 

1.0

 

 

0.5

 

 

0.1

 

 

0.3

 

 

N. B.

 

 

0.8

 

 

0.8

 

 

0.3

 

 

0.8

 

 

Total

 

 

13.3

 

 

11.2

 

 

3.4

 

 

8.7

 

 

1989 / Total

 

 

80 %

 

 

82 %

 

 

82 %

 

 

83 %

 

* Operated by IMC (now Mosaic) on contract with PCS.
Note: Due to rounding, the sum of mines sometimes differs slightly from the “Sub-Total” and “Total.”

Enjoy and share:

Comments

Comment from Bill Bell
Time: August 28, 2010, 8:55 am

Although I agree with your conclusions, Dr Weir, doesn’t this just show, once again, that government business decisions stink? It was a government that took the decision to privatise. It would have been governments since then that would have had to guide toward, or permit the crown corporation to seek, success.

Is there no middle way between losing public assets to the greed of business and squandering them in the hands of government?

Comment from Michael Warhurst
Time: September 22, 2010, 9:45 am

Government made the right decision to take the potash industry public, and this was the correct decision. Privatization was done by another government which was destructive of public welfare and public finances. The forces of privatization are well funded and have used every device from public intimidation through an owned and subservient media to threats of funding opponents and other devious manipulations of public opinion to make valuable public assets available to private interests at pennies on the dollar.
Government is not the problem, bad government is the problem. It takes money to twist the media and threaten and buy off politicians. If government is corrupted it is not by workers and the poor it is by the high rolling wealthy elites that are the corrupters of government.
Understanding the issues and being involved in the political process is the only way Canadians can expect the government to always act in the interests of all Canadians. A media which is not the trollop of wealthy elites and their corporate ‘fronts’ would also be very conducive to good decisions made in the public interest by politicians.
But manipulation of the media by right agenda agents of corruption cannot be allowed to discourage the public from voting and being involved in our political process.
Right agenda politicians are fronts for very wealthy corps and individuals and have no interest in delivering good government when they form the majority – their patrons actually want no government and bad government is a major step down that road.

Comment from John Calvert
Time: October 8, 2010, 1:21 pm

Good article and good analysis, Erin

One of the unfortunate elements of the current media coverage of this issue is that there is virtually no reporting on the price received by the people of Saskatchewan for the company. Its as if the privatization never happened and Doyle and co are responsible for the dramatic increase in value and the windfall that the shareholders will now receive if it is sold to BHP or to a Chinese company. So the public gets no information about the size of their loss as a result of the policies of the Devine government.

I was curious about the original sale price, so I am glad you have provided this information.

Nice job, Erin

Write a comment





Related articles