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Private Industry Efficiency without Private Industry Costs

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Quick look at the Canadian tar sands, the problem with royalties as the system is now, and the potential for state-owned enterprise to become palatable to those who do not like socialism.


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I'm from Canada, famous for our politeness and our filthy, environment-destroying tar sand oil which nobody likes and few believe we should use but which we are choosing to anyway because there's a quick buck to be made there somewhere. I'd say we should think of the children and the future they get to live in when engaging in something like this but that type of thinking has kind of gone out of fashion so let's just roll with the assumption we should mine and try to sell this dirty bitumen to whomever wants it. Canada is relatively resistant to climate change side-effects anyway so this insanity has a sort of strategic, a**hole logic to it. The question thus becomes: Is the province of Alberta, where most of the bitumen is, and Canada getting a fair shake from the destructive extraction and sale of this non-renewable resource?

The answer seems to be no. Canada makes about 6 and half bucks in royalties per barrel of bitumen while the barrels sell for $76 as of January this year. The operating cost per barrel is around $20, at least for the Cenovus Christina Lake which is not particularly different from most of the operations. Thus, profit per individual barrels is about $51. (1)

Not bad considering they don't even actually have to pay even that in royalties until their initial investments are repaid. Former premier Lougheed of Alberta was able to get 40% of resource revenues back during his reign between '71 and '85. As of 2011, that number has fallen to 9%. Canada is quite ridiculous when it comes to allowing our provinces to compete with each other in the hunt for investment. When former premier Ralph Klein tried to get between 20 and 25% in royalties, oil companies threatened to flee to the neighboring province of Saskatchewan and British Columbia. (2) For some reason, Canada has no rules against racing to the bottom in royalty rates despite the fact we all pay for it. The way things are now is like if a family store had each of its members trying to undercut each other by selling for less and less since they would personally get a dollar from the sale if they managed it. We have provincial transfers where money is shared between provinces anyway so this seems insane to me.

Basically, this system says to me that a change is required that will get me labelled as a socialist should I suggest it. I want the people of Canada to get 100% of royalties and private corporations, many of whom are involved being foreign owned, to get none. This of course means Canada would need its own oil company which would be publicly owned. Considering Canada just allowed Chinese government-controlled CNOOC Ltd to purchase Canadian-US owned Nexen Inc. and its operations in the Athabasca tar sands at higher than market price suggests maybe our suggested love of free enterprise is second to those of shareholder profits. (3) This is good because the shareholders that make up the Canadian taxpaying population love profits as well and would kind of like some in exchange for our bitumen. The investment funds may be difficult for Canada to round up without corporate help but compared to what is being lost, it's peanuts in the long term.

Now, I will of course get the usual cries of, "Hey, you get jobs and economic activity from it already plus the government would run it into the ground like it does with everything so just live with 9% royalties." A fair point I believe. The jobs and economic activity around the tar sands are nice. However, it seems worth mentioning that those would not go anywhere if the operations were undertaken by the government. People would still need to get the oil out of the ground so we can sell it and economic activity would still be necessary for the equipment to be available to do so.

As for the government being incompetent and forms of socialism historically failing, I believe there is much truth to that. Free-market capitalism, as theoretically understood at least if you do not feel it has ever really existed, does understand something socialism seems not to. This being positive incentives. Personal profit for owners and investors motivates efficiency while socialism tends to only rely on negative incentives in the form of threats and coercion if you don't do your job. This is bad for morale and breeds instability. Of course, capitalism also breeds problematic positive incentives in the form of doing evil and destructive things for profit like forming monopolies, mistreating employees, polluting, bribing politicians, and other behavior that is profitable but bad for society as a whole.

So the questions become, how do we get positive incentives for a public enterprise? How do we cut through the bureaucratic failings that occur when state employees, who are risking none of their own money but only that of the taxpayer in general, fail to be efficient and run something properly? And how do we do this without handing over most of the money to groups and individuals who feel they owe nothing to Canada and will generally invest and spend their profits away from the country?

The answer is pretty simple and I am surprised socialists don't use this concept more often. We make those in charge of the operation personally and correlatively to gain if it is undertaken well. In the same way major shareholders see something is run smoothly because it is their money on the line and their financial gain when it works, we create financial incentives for the individual or individuals in charge of the operation that only apply if it works. Hell, it could be set up so they receive no pay at all if certain criteria aren't met. Without going into technical details about the operations that I don't understand, I'm sure criteria on proper rate of return could be formed based on current operations. It needs to be high enough that it attracts real talent but compared to the vast billions in profits earned by the private companies and lost by Canada currently, it would definitely be much more affordable. A TED talk even puts forward the research that after a certain level, financial incentives actually decrease performance so it may not have to be mind-blowingly high to have the best people on the job. (4)

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Like all good politics, it steals the best idea the opposition offers and applies it to itself. We would have the same style management that free-market enthusiasts insist on as being necessary without having to rip off Canadians. Now really, this can and should be applied to almost any public enterprise that can have its results objectively analyzed to ensure quality does not fall. The only danger really comes from public-sector unionization forcing up the cost which the private sector usually simply doesn't allow. Public-sector unions are disproportionately powerful in Canada and, without going into huge detail, have some inherent problems. First, they can strike and shut down the entire system if their roles are critical which can override democracy, essentially neutering the executive, legislative, and judicial branches. Second, that they are not self-correcting like in the private sector because the government generally will not collapse if they take too much since taxes can be raised on everyone else. Well, up to a point anyway. Third, the government already tends to treat its employees well since they help form compensation policy and government officials do not personally make more by underpaying or mistreating their employees. Fourth, as the public-sector unions are inherently in conflict with taxpayers, they seem to actually make people more critical of unions in general while really, private-sector unions are more necessary than ever in this age of neo-liberalism. Although there could potentially be problems with having government officials who make more for paying their employees less while trying to de-emphasize public-sector unions, the federal government could pass laws about minimal pay for certain positions based on industry standards that could negate this.

Really, it would be nice if public enterprise could be more efficient without having to pay a head honcho much more than anyone else involved but someone competent really does need to be in charge and totally accountable which costs money. And to be honest, the alternative of simply giving the wealth away to a privileged and already wealthy oil elite while our country runs deficits is getting a little hard to bare.

1 click here

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2 click here

3 click here

4 http://www.ted.com/talks/dan_pink_on_motivation.html



25 year-old Canadian student, currently attaining my masters in political science. Work with mentally disabled individuals for employment. Try to be politically involved. A card-carrying member of the provincial and federal green parties of Canada. (more...)
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