By Bryne Purchase
This editorial is reprinted from QP Briefing, a Torstar Media website that covers the Ontario legislature and focuses on provincial affairs.
The ostensible purpose of the Wynne government’s Advisory Panel on Government Assets is to advise the government on maximizing the value of its assets, whether through better management, restructuring or, indeed, outright sale.
The Panel’s preliminary recommendations were very cautious on the controversial question of outright privatization. For the most part they avoided it, arguing instead that the publicly owned entities they examined could be reengineered to increase shareholder value, while still remaining publicly owned.
But perhaps the “privatization interests” on Bay Street just had to be thrown a bone. So the Panel recommended separating Hydro One Network’s transmission and distribution assets, and then privatizing the latter (both Hydro One and Hydro One Brampton distribution utilities).
In doing so, the Panel left all logic and their central mandate behind. In fact, the Panel does not use maximizing “shareholder value” as the reason for privatizing Hydro One Networks’ distribution assets.
As the Power Workers’ Union (PWU) points out – in their response to the Panel’s interim recommendations – there is not any detailed analysis of the costs and benefits of separating Hydro One’s transmission and distribution assets and then privatizing the latter.
That the Panel made its recommendation before the detailed analytical and statistical evaluations were done surely isn’t normal business practice. How then did the Panel decide to recommend privatization?
Well, it seems they were convinced that the electricity distribution sector in Ontario is deeply inefficient. Why? The Panel says that of 70 local distribution utilities, about a third can be “considered as small;” and, we are left to assume, therefore “inefficient.”
In short, the Panel implies, but does not document, huge cost savings from consolidation; but these “small” utilities serve less than 4 percent of Ontario customers. So maybe, from a province-wide perspective, consolidation would not yield such a big saving after all. Moreover, the Panel doesn’t explain why the small utilities will be targeted by a privatized Hydro One or Hydro One Brampton.
The dominant cost in the sector is for unionized labour to service the electrical apparatus; but again the Panel doesn’t describe how privatization will wrestle down these costs. In fact, it desperately tries to avoid that political minefield.
Nor does the Panel deal with the question of why a private owner would be more motivated than a government to care about labour costs, given that the rate of return is regulated anyway.
But let’s accept the premise that, for whatever reason, many local distribution utilities should be merged. Why not have the government owned Hydro One Networks be the catalyst? Why involve private equity capital at all?
Does the Panel think that governments can’t do anything efficiently? No, because they did not recommend any other wholesale privatizations. Even Hydro One Networks itself is given a blessing to carry on with its transmission business.
At this point, the Panel’s argument seems to be that the government’s investment capital is scarce and should be devoted elsewhere. Why? If there is a big enough investment return to attract private equity, then why not the government’s equity?
Why should the taxpayer be concerned? Why should the agencies that rate the government’s debt or Hydro One’s debt be concerned? Indeed, why should the Ontario Tories be concerned? This is “good” government spending because it would increase the government’s future income by significantly more than its cost of borrowing.
One should also remember that, in the provincial and municipally owned electricity sector, the Ontario treasury collects simulated federal taxes. Upon privatization, these payments would then actually flow to the feds. This has always been a big stumbling block to privatization.
Unless the private sector pays a big premium for the assets, it will cost the Ontario government money to privatize them. But why would the private sector pay a premium when they actually have to pay their federal taxes rather than receive them as the Ontario government does?
The inconvenient truth is that Ontario’s distribution assets are worth more in government hands than in private hands. And if they weren’t, the great privatization wave would have happened already.
The Ed Clark Panel is just trying to shoehorn an ill-advised privatization initiative into an otherwise decent set of recommendations on how to maximize government asset value. The Liberal government should reject it as bad economics.
Bryne Purchase is an adjunct professor in the School of Policy Studies, Queens University.
See also "The EDA view on LDC restructuring" and "Scrutiny intensifies over ownership of LDCs" for other views on the options for LDC ownership and restructuring.