McGuinty’s Super Privatization

The front page of today’s Toronto Star reports, “The Ontario government is looking at creating a publicly held $60 billion ‘super corporation’ of assets such as the Liquor Control Board of Ontario and Hydro One and then selling a minority share to private investors.” It would also include the province’s other major Crown corporations: Ontario Power Generation and Ontario Lottery and Gaming.

More than a month ago, my pre-budget testimony at Queen’s Park noted, “Another proposal has been to raise money by selling provincial assets. . . . just to break even on privatizing Crown corporations, the Government of Ontario would need to sell them for $72 billion.”

Apparently, I was correct to suggest that the McGuinty government was contemplating selling all of Ontario’s major public enterprises as a package. And my estimate of what that package might be worth was in the right ballpark.

However, the government is proposing to sell only a minority stake, while retaining control of the assets and most of the profits. Although it is obviously trying to avoid the usual objections to privatization, many people will legitimately worry that this scheme is a slippery slope toward a more complete sell-off. Even if one believes that Liberals would never sell more than half of the “super corporation” shares, setting up the entity and issuing shares would make it easy for a potential future Conservative government to finish the job.

In (temporarily) avoiding the worst pitfalls of privatization, the government’s proposal also misses the supposed benefit of privatization: replacing public-sector management with allegedly superior private-sector management free from political influence. Rather than changing how Crown enterprises are managed, the “super corporation” would mostly be a way to convert a portion of future revenues from Crown enterprises into up-front cash.

Essentially, the Ontario government is considering a reverse mortgage from Bay Street: the government gets cash today and retains control of its house, but loses some of the ownership. Would that be a good financial deal for the provincial treasury?

As I noted in my pre-budget testimony, if the Ontario government writes long-term bonds at 5% interest and levies a 10% corporate tax on privatized profits, the $4 billion of annual Crown-corporation profits are worth $72 billion of up-front cash. However, The Star reports that the super corporation “could be worth between $50 billion and $60 billion.”

If the government sold one-third of the shares based on a $50-billion valuation, it would shrink the current year’s deficit by $16.7 billion. That would reduce future debt-servicing costs by $0.8 billion per year. But giving up one-third of Crown corporation profits would reduce provincial revenues by $1.2 billion per year. On balance, Ontario taxpayers would come out nearly half a billion dollars poorer.

So, partially privatizing public enterprises seems politically clever, but financially stupid. The Star quotes a Liberal insider almost admitting as much: “It would satisfy the left because you would still have unionized workers at these publicly owned entities and it would satisfy the right, which always wants to privatize things . . . The only downside is if the market doesn’t react positively to it.” Indeed, there are a couple of reasons why the market might even value the “super corporation” below $50 billion.

First, the stock market generally discounts conglomerates relative to pure plays. On New Year’s Eve, I appeared on the Business News Network regarding privatization (watch video). My co-panellist was John Sadler, an advocate of privatization. He concluded the discussion by rejecting the idea of amalgamating Ontario Crown corporations and then selling shares in the conglomerate because the market would apply a steep discount.

Second, The Star reports, “There would be foreign ownership limits, no single shareholder would be able to own more than 5 per cent.” While such restrictions may serve legitimate public-policy goals, they would also limit the field of potential buyers and hence the likely sale price.

A final question is whether the super corporation would have to pay federal corporate income tax. Doing so would reduce the profits it could remit to both the provincial government and private investors (and hence the amount that they would pay for shares.) However, it is possible that retaining control and majority ownership would allow the Ontario government to classify the new entity as a provincial Crown corporation exempt from federal tax.