Got a problem? Privatize it (and pay the price for selling off Hydro One later).

Posted on in Governance Debates

BehindtheNumbers.ca – A Blog from the CCPA – 2015/04/16
April 16th, 2015.   Sheila Block

The provincially appointed panel led by former TD Bank CEO Ed Clark has released its final report and the Wynne government has said it will act on its recommendations.

It includes fully privatizing part of Hydro One and selling off a majority stake in what remains.

The government is trying to position this sale as an “asset swap”, promising to use the proceeds of the sale to fund much needed investments in transit infrastructure. But in doing so, the government is ignoring its own previous expert advice: neither Metrolinx nor a provincially appointed panel headed by Ann Golden, suggested selling off vital public assets to fund transit.

This privatization will raise only $4 billion for infrastructure investment. While that might seem like a lot of money to you or me, it is less than 15 per cent of the cost of the government’s transit investment plans.

Here are five reasons why this sell off is a bad idea:

Privatization would be a bonanza for Bay Street but bad news for Main Street. A recent article in the Globe and Mail described how Bay Street had scrambled for the estimated $110 million in fees from the last privatization effort in 2002. We can only imagine how much more fees will be some 13 years later.

That money won’t come out of thin air. It would either come out of the pockets of hydro customers through rate increases or revenue losses paid for by all Ontarians through their taxes or public service cuts. Lining the pockets of Bay Street firms isn’t a good use of a valuable public asset such as Hydro One.

The province’s finances will suffer if it privatizes Hydro One. There is a good reason why Bay Street investors are lining up to buy a piece of it: Hydro One’s financial statements show earnings of between nine and 11 per cent since its inception. That’s a huge return on equity for any investor, so why wouldn’t the government keep this “Golden Goose” for the people of Ontario. Currently that revenue helps pay for hospitals, schools, and other public services. With a sale, Ontarians would lose out on those revenues – year after year after year. Two academics in law and business, Trebilcock and Melville, have identified that the province would give up far more money in future revenue that it would make from a quick sell-off.

When you consider that the province’s borrowing costs are below three per cent – historic lows – the loss of those earnings makes even less sense. Why sell off a valuable asset with guaranteed returns of nine to 11 per cent per year when you can borrow that money for less than three per cent per year?

The cost to Ontario’s coffers doesn’t stop there. Because it is a crown corporation, Hydro One doesn’t pay taxes to the federal government, instead, a payment in lieu of taxes is retained by our province. The Wynne government has often lamented that Ontario does not get its fair share of revenue from the federal government, whether it is in the form of transfers, equalization, or access to Employment Insurance. If Hydro One is privatized, even more money will flow to the federal government from Ontario.

A review of similar privatization schemes in Canada and internationally suggests that privatizing Hydro One will very likely increase rates. Nova Scotia, which privatized its electricity system a generation ago, now has the highest electricity prices in Canada. We know that a private operator will likely borrow money to pay for the purchase and, later, pass that cost onto customers. Because a private corporation is profit-oriented, it won’t discriminate between high-income and low-income hydro consumers – everyone will pay more while receiving fewer public services because of lost revenues to Ontario.

Innovation will suffer. Ontario Hydro has been used with modest success as a public policy tool to promote industrial development, to cushion the impact of rising rates on consumers, and to green our economy. For example, in recent years Hydro One has been directed by government to prioritize the infrastructure investments required to enable renewable electricity sources. A profit-driven private entity would not have made these green choices when other infrastructure investments would have offered higher return on investment. Taking government leadership out of greening Ontario would be a mistake and a step backward.

Ontario’s track record with partial privatizations doesn’t inspire confidence. The eHealth scandal resulted in $16 million dollars of untendered contracts going to consultants, along with extravagant pay hikes and bonuses. The ORNGE ambulance scandal was accompanied by enormous salaries, corruption, and failures in delivering vital public services.

In her first budget with a majority mandate, Premier Wynne had the opportunity to set a very different path for the province’s finances. She could have increased taxes to pay for the infrastructure investment Ontario so badly needs. Instead, she chose a route that will result in future generations paying for her short-term political gains.

Sheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ Ontario office. Follow Sheila on Twitter: @Sheila_M_Block

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