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February 4, 2021

From: Marcel Boyer 

To: Canadians Concerned about Business Grants

Date: February 4, 2021

Re: Government Support for Business Would Benefit from Auctions

Business support programs from governments are numerous, offered by every level, generally somewhat opaque and costly. They take many forms: a direct grant, a loan at a low (zero) interest rate, a loan guarantee, a reduced tax liability, a subsidized sale price (electricity to aluminum producers, for instance), a guaranteed buying price (for wind turbines), a right to enforce production limits, market sharing and price-fixing (supply management for instance), and direct equity investment in specific firms. 

In 2010 Paul-Daniel Muller and I estimated that the Québec government had at that time some 135 business support programs costing $3.6 billion per year, double what Ontario was spending. More recently, John Lester said the federal government and the four largest provinces were spending $29 billion a year “on business subsidies, delivered through program spending, the tax system, government business enterprises and direct investments by government … almost half of the corporate income tax revenue collected by the five jurisdictions.”

We can be suspicious of government grants, loans, loan guarantees, and even of equity investments in private firms, particularly to the extent that they rely on the rationale that the government faces lower financing costs than the private sector. I showed in a previous Intelligence Memo that this was a pervasive error, endemic in the public and private sectors as well as academia. The error comes from the fact that part of the cost of government financing hides under the rug, namely the risks transferred from lenders to taxpayers, who are not compensated for bearing those risks.

The only transparent way to proceed in the context of these programs is to auction off each specific government assistance project, thus transferring to a national or international private financial consortium the responsibility for honouring the grant, loan, loan guarantee, or the capital injection. This consortium is to assume the outlays and to benefit from repayments at levels and under conditions determined by the government assistance project, in exchange for a premium paid by the government.

As the conditions attached to these assistance projects, subsidies, or equity participations are naturally more favourable for the beneficiary entity than similar financing obtained on financial markets, the premium, which could take many forms, is the competitive compensation required by the winning consortia for assuming the government’s commitments.

From the citizens’ perspective, the smallest premium emerging at the auction is the best estimate of the public cost of the assistance or support project, i.e., the expenditure to be recorded in the government expenses. Alternatively, the government could choose to subscribe an insurance policy with private insurers/investors, who would assume the risk of repayment of the assistance previously borne by taxpayers.

One advantage of auctioning government assistance projects is to nip in the bud the ubiquitous risk of a creeping crony or collusive capitalism, which helps ensure incentives for firms to contribute to economic growth and social well-being, thanks to the transparency of the auctioning process.

No matter how grandiloquent the intentions expressed by the government and other stakeholders, it is neither the role nor the competency of elected officials and bureaucrats to play a stockholder game with taxpayers’ money.

Marcel Boyer, O.C., FRSC, is a C.D. Howe Institute Research Fellow, and Professor Emeritus of Industrial Economics, Université de Montréal.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.