Private vs Public:

How Can a Private Entity Compete Against Government Subsidies?

As a business student, the focus of my education is how to successfully manage a business. Businesses consist of many aspects and details, each business different from the next. Businesses need to work within constraints, to gauge the market, to manage cash flow, to make sound decisions. Business owners expose themselves to professional risk, financial risk, and emotional risk. A business experience can be an exhilarating, wonderful success. It can be a horrible, humiliating, life-destroying disaster. Inherent in the process is the assumption that all businesses operate on a level playing field, and that the more savvy business owner will be the victor.

But wait a minute. Is this always true? No. The wild card here is when our friend the government decides to get into a business. What happens to a business owner when her new competitor is a government subsidized entity? Where is the level playing field? How can the average business owner compete with someone who has unlimited funds (from the taxpayers)? As we all know, a government subsidized business does not have to make good decisions, does not have to follow regular rules of business. Has free access to legal, fiscal, and judicial assistance. What is the average business owner to do? How must she change her thinking and practices to survive in an environment that is so clearly slanted towards her competitor? To add insult to injury, business owners pay taxes that are used to subsidize their competitors. How is that fair? Is this ethical?

I work with an entity that must deal with this inequity. I work for Mont du Lac Snow Area, a small privately-owned ski hill. The direct competition is SpiritMountain, a publicly-owned ski hill. Listening to the owner’s stories, you get a sense of his frustration with having his competition backed by the government. His business is a tax payer, the competition is a tax receiver.

Mont du Lac has been in existence since the 1950’s. It was a nice family-oriented ski hill. Then one day in 1975, here comes SpiritMountain. A comparatively large ski hill created with public funds. No expense was spared for this new business, and it has received public subsidies since its inception. If SpiritMountain does not bring in enough revenues to cover expenses, Mr. and Mrs. Taxpayer are called upon to make up the difference. If Mont du Lac does not meet expenses, the owner must come up with the difference with his own money, or seek bank financing and pay interest, along with paying taxes to cover his competitor’s losses. Is this situation healthy and good for our society? Why is this allowed to happen? According to Robert Tranholt, owner of Mont du Lac, “How can we compete with SpiritMountain? They are not required to pay property taxes, do not have to pay for liability insurance, and have a full array of city attorneys at their disposal at no cost to them. And it really galls me that I pay taxes that are forwarded to my competition. Do I sound angry and disgusted? Well, I am.”

Mr. Tranholt replied when I asked him his opinion of SpiritMountain. He also used a few choice words that I will not quote here. Frankly, I do not blame him for his frustration. He and his partner put their life savings into their business and work long hard hours. Some years it does pay off, but more often than not, revenues have difficulty meeting expenses.

Dale Lewis, President of Park State Bank, sees a different side of the SpiritMountain situation. She is involved in tourism promotion and believes Spirit is good for the community as a whole. Using the trickle down theory, it is therefore good for Mr. Tranholt. Her position is that Spirit is good for Mont du Lac. “A rising tide lifts all boats. SpiritMountain revitalized the community’s interest in skiing.”

Others have written views of this topic. Jose D. Antommarchi, President of Tech Resources, Inc. addressed the House Science Committee in 1997. His business was doing well in the 1990’s, successfully competing with other private companies to assist small manufacturers with their operations. This was going well until the US Department of Commerce NIST organization created an entity that was in direct competition with Tech Resources. The company saw sales decline by 94.6% the first year. They were competing with a government created, subsidized, promoted, and sponsored entity that enjoyed tax exempt status.[1] Tech Resources requested that the government sunset its competing organization. The paper does not site the results of the request.

Lawrence W. Reed discusses the private/public debate in his paper “State Government Competes Unfairly with Private Firms”. He compared government entity competition to overseas “dumping”. One example he used was government owned campgrounds competing with private campgrounds. SpiritMountain also runs a campground in the summer. This struck home; as I do accounting for a city owned campground leased to a private business (Indian Point). I hadn’t thought about this before. We had always gleefully crowed, “Boy, we could never run this privately and make this much money!” Here I am slamming SpiritMountain while I am involved in the same thing. Private campgrounds could never compete with Indian Point, as there are no property taxes and the city handles the maintenance, and takes care of the signage. A private campground could not compete. He also looked at Universities competing with private businesses when selling things such as computers and items produced in prison and sold at a discount. He sees this problem as having crept up on us. His position is, “At the very least, state-supported entities should be audited and their income statements and balance sheets charged with these implicit costs. That way we would find out if the taxpayers are getting a break or if they'd fare better through contracting out to private firms.”2

In “The Sickly State of Public Hospitals,” Sam Vaknin, PhD discusses the role of public hospitals in our society. He does not see private hospitals competing with the public versions, as public hospitals handle low-profit types of health care, while the privately owned hospital focuses on profit-making types of services. This leaves public hospital with fewer financial resources, adding to the public perception of substandard care at a “public hospital.” This is a reverse of most private-public struggles, where the public entity has an advantage.

How about states providing assistance to retain and attract specific businesses? Should public monies be used in this manner? In “Congress Should End the Economic War Between the States,” by Melvin L. Burstein and Arthur J. Rolnick, Federal Reserve Bank of Minneapolis4, the authors found this to be a common practice in many states. How does this interfere with the workings of private business? How can existing non-subsidized businesses compete with the new kid on the block? In an era where many cities and states are struggling to provide basic services, does it warrant the additional jobs that may potentially be created? The authors’ position was that it does not.

Dennis Polhill5 says, “The Federal government has investigated Unfair Competition frequently since 1980. In 1980, the SBA did a study which yielded numerous grievous examples of and extensive recommended actions. In 1986, a White House Conference on Small Business labeled Unfair Competition as the third most serious concern in the country for small business. In 1987, the GAO surveyed 27,000 businesses, nearly two-thirds of which were found to be suffering from Unfair Competition.” He sites three recommendations:

  1. All regulations which do not apply to government entities, but do apply to private industry, should either be abandoned or uniformly applied.
  2. Agencies of governments that supply private goods to the market should lose their tax-exempt status.
  3. Governments should adopt accounting practices and management approaches that reveal more closely the true cost of the service provided.

Another study was done by R. Richard Geddes in “Case Studies of Anticompetitive SOE Behavior.” His conclusion regarding the private/public debate is that, “In cases in which the government and private firms compete, more efficient private rivals may reduce their endeavors, or may be loathe to invest in activities where there is significant government competition or uncertainty about future government competition.”6

After studying the literature in existence, I believe I have an informed opinion about the private vs public question in business. Some goods and services are more appropriately provided by the government. Schools, hospital, and utilities are examples of this type of service. In other areas, private businesses should be allowed to fairly compete to provide services. The ski hill, campgrounds, and various other things should be left to the private sector. The deciding factor for me is whether the business provides necessities or optional services. I also consider what will provide the greatest good to the greatest number. Governmental entities providing services are not inherently bad, but we need to use discretion in their use.

Ethical Questions to Consider Regarding Public Entities in Business

  1. Is there currently a private business providing the goods or services? If yes, is it ethical for the government to create unfair competition?
  1. If government steps in with its own version of the goods and services will this help or harm the existing private business?
  1. Can a government entity provide the goods and services at a lower cost than the private business?
  1. Are the goods and services things that private businesses are not able to produce?
  1. Will creating this public entity provide the most good to the most people, or should private business take care of the need for the goods and services?
  1. Will government have an economy of scale not available to the private business, therefore providing the goods and services more efficiently?
  1. Should private businesses have recourse when a public entity pops up to compete with them? Should they have anything to say about how the public entity is run?
  1. Should a private business have veto power when a public entity competition is

Proposed?

  1. If a private business folds due to public entity competition, should there be special compensation for that business owner?
  1. Finally, who should decide in these matters? All parties will have vested interests in the outcome, so how could we find a neutral party for input?

Sources Cited

1. Jose D. Antomarchi President of Tech Resources, Inc. Position Paper addressing the House Science Committee, addressing the Subcommittee on Technology. 1997

  1. “State Government Competes Unfairly with Private Firms,” by Lawrence W. Reed, MackinacCenter for Public Policy, 1992.

3. “The Sickly State of Public Hospitals,” by Sam Vadkin, PhD. 2002

4. “Congress Should End the Economic War Between the States,” by

Melvin L. Burstein and Arthur J. Rolnick, Federal Reserve Bank of Minneapolis

1995

  1. “Unfair Government Competition Against Small Businesses,” by

Dennis Polhill 1993

6. “Case Studies of Anticompetitive SOE Behavior,” by R. Richard Geddes

2004

7. “IN DEFENSE OF DEMOCRATIC GOVERNMENT: The Proper Size and Role

Of Government,” by Steve Kangas 1993

  1. “It’s Our Business,” Washington Research Council, 2001
  1. “Competitive Neutrality: Ensuring a Level Playing Field in Managed

Competitions,” by William D. Eggers, NationalCenter for Policy Analysis, 2001

  1. “Best Value Procurement: How Federal and State Governments are Changing the

Bidding Process,” by John R. Heisse II, 2002

  1. “How the For-Profits Business Can Compete For Clients With the Not-For-

Profits,” by Lea Strickland, CMA, CFM. CBM, 2005

  1. “Don’t Fence Me In,” by Al Podboy, 2002