A Reverse Mortgage on Ontario’s Crown Jewels

I have the following op-ed on page A19 of today’s Toronto Star. It reiterates points made before on this blog.

The only substantive difference is that I had previously low-balled the annual profits of Ontario’s Crown corporations at $4 billion. Today’s op-ed assumes $4.3 billion, the amount anticipated for the current fiscal year.

That assumption probably still understates the value of Crown corporations, which are projected to generate $4.8 billion by 2011-12. Even ignoring likely future profit growth, the proposal to privatize a minority stake in provincial-government enterprises looks like a ripoff for the people of Ontario.

Privatization a bad deal for Ontarians

March 10, 2010

Erin Weir





This week’s provincial throne speech indicated that Queen’s Park has “initiated a review of its business enterprises.”

The Ontario government is reportedly considering combining these enterprises into a “super corporation” and selling a minority stake to private investors. This proposal is politically clever, but would be a financial blunder for the province.

The super corporation would apparently include Ontario Lottery and Gaming, the Liquor Control Board of Ontario, Hydro One and Ontario Power Generation. The main objections to privatizing these Crown corporations are that they provide a steady stream of revenue and control socially important assets.

The governing Liberals have tried to avoid these objections by musing about selling only a minority stake. The province would retain control of the assets and a majority of the revenue that they generate.

An important concern is that such partial privatization could be a slippery slope toward a more complete sell-off. Even if one believes that the Liberal government would never sell more than half of the super corporation’s shares, establishing this entity and issuing shares would make it easy for a possible future Conservative government to finish the job.

In at least temporarily avoiding the worst pitfalls of privatization, the Liberals would also miss the supposed upside. Privatization is usually intended to replace public-sector management with allegedly superior private-sector management free from political constraints. Selling a minority stake would not change management.

The super corporation would mainly just convert a portion of future revenues from Crown corporations into upfront cash. Essentially, the government is considering a reverse mortgage: it would get a large dollop of one-time money and retain control of the house, but lose some ownership.

The throne speech pledged that the government “will use the proceeds to better support Ontarians’ highest priorities.” Obviously, all provincial funds should be used to support Ontarians’ priorities. The real question is whether the proceeds of selling shares in government enterprises would exceed the proceeds of keeping all the revenues from these enterprises.

The Star has reported a value between $50 billion and $60 billion for the super corporation. Selling one-third of the shares based on a $50 billion valuation would raise $16.7 billion (minus hefty Bay Street fees). With long-term provincial bonds paying just under 5 per cent interest, reducing current borrowing by the full $16.7 billion would lower future debt-servicing costs by $800 million per year.

On the other hand, Ontario’s Crown corporations are expected to generate profits of $4.3 billion this fiscal year. Giving up one-third would reduce provincial revenues by more than $1.4 billion. If the super corporation were subject to provincial corporate tax, the scheduled 10 per cent rate would recoup $140 million. Still, annual provincial revenues would be $1.3 billion lower.

The government would lose more than $3 of revenue for every $2 saved on debt servicing. In total, Ontario taxpayers would come out half a billion dollars poorer every year.

Just to break even, the provincial government would need to value its super corporation at more than $70 billion. But private investors would not accept such a valuation.

Those who want a steady return of nearly 5 per cent can simply buy long-term provincial bonds. Prospective investors in government enterprises would clearly expect more. If investors could not increase profits by taking over management, the only way to achieve a higher return would be to buy shares based on a lower initial valuation.

Furthermore, the stock market generally discounts conglomerates relative to pure plays. Many investors might be interested in sectors like liquor retailing or electricity transmission. Far fewer would be interested in an unwieldy hodgepodge of different enterprises concentrated in a single province.

The government would reportedly limit the number of super-corporation shares held by any single investor and by all foreign investors. Such restrictions may serve legitimate public-policy goals, but would further reduce the field of potential buyers and hence the likely sale price.

Under the Constitution, one level of government cannot tax another. Provincial Crown corporations pay no federal corporate tax. If the super corporation were subject to federal tax, its profits would be less than those of existing provincial enterprises.

To justify the risks of even partial privatization, the government should be expected to demonstrate significant rewards. In fact, the province would lose more than it would gain by selling shares in a super corporation. The people of Ontario would be better served by maintaining public ownership of our Crown corporations.

Erin Weir is an economist with the United Steelworkers union.

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