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Chosen Instruments

by Scott Proudfoot, Principal
July,2000

Why the Canadian government treats some companies better than others?

The federal government’s award of $144 million to companies owned by Bombardier from the Technology Partnerships Canada program generated controversy last year. The principle criticisms were that large, profitable companies such as Bombardier should not be subsidized and that Bombardier receives preferred treatment because it is a Quebec company.

On the first criticism, Bombardier clearly has been to the well repeatedly — at least $1.5 billion in grants, loans and/or loan guarantees over the last couple of decades.

On the second criticism, Bombardier has been known to play the Quebec card, but this is only a partial explanation for its success in government circles.  Bombardier has been very adept at taking money-losing enterprises off the government’s hands — with the public sector partially financing the purchase.  For example, when Bombardier bought de Havilland in 1992, it negotiated a $370 million government support package.  The de Havilland purchase has turned out to be an extremely smart deal for Bombardier but the Federal and Ontario governments also benefited.  A cash pit that had cost hundred of millions of public dollars was divested and thousands of Ontario jobs were preserved.

Bombardier also owes much of it success with the federal government to its unofficial status as a Chosen Instrument.

Chosen Instruments are private sectors companies in Canada who enjoy the status of quasi-crown corporations.  By blending their private interests with the public interest, they are seen by generations of government officials as instruments of the national interest.  Because these companies support the "national interest", the government goes out of its way to support these companies and their interests. Over time, it can be argued that Chosen Instruments do receive "better" treatment from government than many other companies.

In addition to Bombardier, potential candidates for Chosen Instrument status, past and present, might include: The Big Six Banks, BCE, CAE, Canadian Airlines, Canadian Marconi, Canadian Pacific, Computing Devices, Dome Petroleum, General Motors Diesel,  Nortel, Oerlikon, Pratt & Whitney Canada, Trans Canada Telephone Systems, Trans Canada Pipeline, Syncrude, etc.

The principle features of Chosen Instruments seem to be:

  • The choice implicit in the concept of Chosen Instruments is mutual. Chosen Instruments take government seriously. They owe a substantial portion of their business success and shareholder value to their management of the government factor.  Their expertise with government is used to create a significant competitive advantage for themselves.
  • Chosen Instruments tend to be politically adept. Even more important to their long-term success is their maintenance of links to the public service, usually aided by their openness to cherry-picking the public service for key employees.
  • Canadian ownership is not an absolute requirement but it certainly helps.  Nationalism provides a strong motivation for supporting Chosen Instruments.
  • The companies tend to be market leaders in their field or minimally the Canadian market leaders.  Since Canadian market leaders tend to be smaller global players, this provides one of the main rationales for the government’s support.  
  • The list of Chosen Instruments tends to skew towards defence companies.  To a great extent, what used to be described as the military/ industrial complex has evolved into a commercial/military/industrial complex.  Because issues of transportation, communication and resource development have always been crucial in Canada, there are Chosen Instruments in all these sectors.
  • Canada tends to have Chosen Instruments in those sectors in which other countries favor and subsidize their own Chosen Instruments. Favoring certain companies can be a protective reaction to similar practices in other countries.
  • Sometimes Chosen Instruments congregate around certain departments. DND has the largest number, Heritage Canada has a few.  Others can be provincially based; for example, Fisheries Products International in Newfoundland or the Wheat Pools in Saskatchewan.
  • Chosen Instruments are subject to trends and some fall by the wayside over time.  In the late seventies, it was energy development and mega projects – Remember Dome Petroleum? Currently, high tech electronics is in vogue.

The most remarkable feature of the government’s policy of supporting Chosen Instruments is that the policy remains unwritten, unacknowledged and, at least partially unconscious.

Successive generations of officials have supported this policy and successive ministers of various ideological biases have bought into the policy.  It is one of the few consistent themes of post-war industrial policy in Canada and the closest the federal government has come to having a coherent industrial strategy.

The policy remains unarticulated because it is controversial! If government picks winners then, by definition, it is also picking losers.  Determining where the public and private interests meet is an inherently subjective exercise and open to argument.

The Canadian Government’s predilection to support Chosen Instruments has had remarkable longevity but there are a few question marks on the horizon.

  • Successive budget cuts means less money to subsidize business. The trend also is away from direct grants towards recoverable loans.
  • An increasingly liberalized trading environment places more limitations on the federal government’s ability to play favorites. The WTO recent slap on the wrist the Bombardier subsidies is an illustration. This trend will continue.
  • Globalization blurs national identity as a relevant indicator of corporate behavior because it inevitably leads to global loyalties and obligations. Bombardier provides a good illustration of this. Its new long range, high speed business jet is a joint venture between Japanese, French, United Kingdom, German and US companies. This certainly makes for a more complicated "Canadian benefits" test.  
     

Who should the federal government favor?  A Canadian company out-sourcing its manufacturing globally or a foreign company creating jobs here.  We can expect more of a policy debate on this issue in the future.

This debate is occurring elsewhere. Former US Labor Secretary Robert Reich’s article Who is Us? Who is Them? made the argument that it is not reasonable to expect global companies to maintain national loyalties.  His policy recommendation is that countries support their competitive advantage by investing in their work force instead of their multi-nationals. A recent OECD Letter stated:

"In many cases imported product contains a higher proportion of local content (tangible and intangible) than a competing domestic product.   For this reason attempts to tilt the playing field in favor of domestic firms through discriminatory trade measures...or preferential treatment may become arbitrary and can be harmful to the economic interests of the country imposing the measures."

Conclusions:

While there are good reasons to think it will be less profitable to be a Chosen Instrument in the future, there is no reason to believe they will disappear. Given the role of government in our economy, there is inevitability to the existence of Chosen Instruments.

It is at least as important to pay attention to the government’s unwritten practices on industrial policy as those which find their way into formal policy documents.  Companies who are not "chosen" could probably learn a thing or two about dealing with government from those that are. 
 





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