McGuintyâ€™s Super Privatization
The front page of todayâ€™s Toronto Star reports, â€œThe Ontario government is looking at creating a publicly held $60 billion â€˜super corporationâ€™ of assets such as the Liquor Control Board of Ontario and Hydro One and then selling a minority share to private investors.â€ It would also include the provinceâ€™s other major Crown corporations: Ontario Power Generation and Ontario Lottery and Gaming.
More than a month ago, my pre-budget testimony at Queenâ€™s Park noted, â€œAnother 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.â€
Apparently, I was correct to suggest that the McGuinty government was contemplating selling allÂ of Ontarioâ€™sÂ 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. AlthoughÂ 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 â€œsuper corporationâ€ 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 governmentâ€™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 â€œsuper corporationâ€ 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:Â the governmentÂ gets cash today and retains control ofÂ its house, but loses some of the ownership.Â Would thatÂ 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-corporationÂ profits are worth $72 billion of up-front cash. However, The Star reports that the super corporation â€œcould be worth between $50 billion and $60 billion.â€
If the government sold one-third of the shares based on a $50-billion valuation, it would shrink the current yearâ€™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,Â partially privatizing public enterprises seems politically clever, but financially stupid. The Star quotes a Liberal insider almost admitting as much: â€œIt 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 doesnâ€™t react positively to it.â€ Indeed, there are a couple of reasons why the market might evenÂ value the â€œsuper corporationâ€Â below $50 billion.
First, the stock market generally discounts conglomerates relative to pure plays. On New Yearâ€™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, â€œThere would be foreign ownership limits, no single shareholder would be able to own more than 5 per cent.â€ 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,Â it is possibleÂ that retaining control and majority ownership would allowÂ the Ontario governmentÂ to classify the new entity as a provincial Crown corporation exempt from federal tax.