A cautionary tale of two telcos

Hey there, time traveller!
This article was published 14/6/2015 (1134 days ago), so information in it may no longer be current.

At a time when the Ontario Liberal government is planning to privatize Hydro One and other provincial governments are also planning significant privatizations, it's instructive to look back and see what the impact of earlier privatizations has been.

There's an excellent example right here in Canada of two neighbouring jurisdictions of a similar size, one of which privatized a utility and the other that kept its similar utility under public ownership. It should be seen as a cautionary tale and an indication of what is likely to happen with other privatizations.

 

That example is the telecom companies of Manitoba and Saskatchewan. These provinces have relatively similar populations — 1.29 million in Manitoba and 1.13 million in Saskatchewan. Both provinces established publicly owned telephone companies at about the same time more than a century ago.

The Government of Manitoba bought Bell Canada's Manitoba operations in 1908 and formed a publicly owned Crown corporation that eventually became the Manitoba Telephone System (MTS). Saskatchewan followed a year later in 1909 by buying the operations of Bell Canada and other private telephone companies in the province and creating a publicly owned operation that became SaskTel. Both eventually bought up all the private telephone operators in their provinces.

Both provinces operated successful, publicly owned telephone systems in their respective provinces for almost 90 years, until 1997. That was the year Progressive Conservative premier Gary Filmon broke previous promises and privatized MTS, claiming a private company would be more innovative. (Some of the sordid details that led to the privatization of MTS were detailed in an article in Canadian Dimension by Errol Black and Paula Mallea at that time).

Meanwhile, next door, SaskTel has remained the only government-owned telecommunications company, even after eight years of provincial rule under the conservative Saskatchewan Party.

It's an understatement to say there have been a lot of changes in the telecommunications industry since MTS was privatized, but 18 years later, both MTS and SaskTel are generally similar in terms of revenues, subscribers, types of services and number of employees relative to their populations. Both have had their share of technological and service advances, although the publicly owned SaskTel appears to have been more innovative than MTS, contrary to the claims a private company would be more innovative.

That's about where the similarities end. It appears the main priorities of MTS are to satisfy their private shareholders and commercial customers, reward executives and promote itself through advertising. Meanwhile, SaskTel appears to focus on customer service and satisfaction, being a good employer and on providing returns to their public shareholder: the people of Saskatchewan.

The cost of basic phone service through the publicly owned SaskTel is $8 per month, 27 per cent lower than the lowest home phone service MTS provides.

Charging higher fees to the public for its services, MTS generates higher revenues and about double the profit of SaskTel, but very little of the profits of MTS come back to the public (unless they happen to be its shareholders or executives). While SaskTel returned $497 million over the past five years to the government and the people of Saskatchewan through its annual dividend, MTS has paid corporate income taxes only once in the past 10 years — and that was only $1.2 million in 2010.

In all the other years, it paid a big fat zero in federal and provincial corporate income taxes, and it doesn't expect to pay any income taxes until 2020 at the earliest, because it is carrying forward hundreds of millions of dollars in expenses.

While MTS doesn't provide any corporate income taxes, it certainly doesn't skimp when it comes to CEO compensation. In 2014, they paid former CEO Pierre Blouin $7.8 million in total compensation. While that was a high, his average compensation over the past five years was $4.8 million, more than 10 times what SaskTel's CEO was paid.

MTS directors are paid more than 10 times what SaskTel's directors are paid.

What's especially disturbing is former premier Gary Filmon, who privatized MTS after promising not to, personally profited from this action while the people of Manitoba lost out. Filmon was appointed to the MTS board shortly after he was defeated. He collected more than $1.4 million in director fees and compensation over 10 years, with hundreds of thousands of dollars worth of shares.

None of this is meant to suggest SaskTel is an ideal company, but it appears abundantly clear this publicly owned and operated company provides better service at lower costs to its customers than the privatized MTS, and it also provides much larger benefits to the people of the province from its profits. Despite all this, the Saskatchewan government may be laying the groundwork for privatization of SaskTel.

If this is what we can expect from the privatizations of other public utilities — higher fees for the public, lower-quality service, much higher compensation for CEOs and executives, higher corporate profits but much lower returns for the provinces — we can see why Bay Street is so excited about the privatization of Hydro One — and why the people of Ontario should be very worried.

 

Toby Sanger is an economist with the Canadian Union of Public Employees and a blogger at the Progressive Economics Forum. This blog post appeared on the Canadian Centre for Policy Alternatives-Manitoba's blog at policyfix.ca.