A new report is warning that the partial sale of Hydro One will place Ontario’s future fiscal health in jeopardy.
The report is authored by economists David Peters and Douglas Peters and was prepared for the Canadian Union of Public Employees (CUPE). It claims that selling 60 per cent of Hydro One as the government has proposed, would come at a cost of $338.8 million every year to the Ontario treasury.
“The electricity transmission and distribution business has been publicly owned and operated successfully in Ontario for nearly a century. It was not appropriate to sell the electricity business to outside investors in the past, and we do not believe it is appropriate for the Province of Ontario to sell it now,” co-author Douglas Peters said.
Douglas Peters is a former chief economist for TD Bank and Secretary of State (Finance) in the federal government. Dr. David W. Peters teaches Business Administration at the University of Guelph-Humber in Toronto.
The economists state that the sale of 60% of Hydro One could save the Province of Ontario $172.3 million in interest costs if the proceeds from the sale were used to reduce the province’s long-term debt. This is based on an assumption that the province is paying 2.9% per year on its accumulated debt.
However, the economists go on to say that this gain is more than offset by the fact that Hydro One’s new private owners would be receiving $511.1 million annually that was formerly going to the provincial treasury.
In other words, while the Province would be better off by $172.3 million because of lower interest costs on paid-down debt, it would also be losing $511.1 million annually in revenue from Hydro One that it is now getting from owning 100% of the Crown Corporation.
Therefore, the net loss to the Ontario government as a result of a 60% sell-off of Hydro One to private interests would be $338.8 million per year.
Central to the economists’ calculations is a rejection of the Province’s claim that the Province would get $9 billion from a 60% sale of Hydro One. In its budget, the government announced that it would be receiving $9 billion from a 60% sale, $5 billion of which would go to paying down hydro debt and $4 billion of which would go to transit and other infrastructure.
However, according to the report, the province would only net $6.389 billion – not $9 billion – before “issuance costs” and $5.94 billion after issuance costs.
Issuance costs include fees charged by investment bankers and lawyers and any other costs over and above the issuance of shares to new investors. The authors assume that stock issuance costs will be 7%, which they say is typical for an IPO of this size.
Other commentaries echo report
The CUPE report is the latest in a growing number of reports and commentaries claiming that the Wynne government’s rationale for privatizing Hydro One is deeply flawed and that Ontario will be worse off financially should the sale proceed as proposed.
These critiques have three common themes.
The first is a rejection of the government’s claim that the amount of money that the Ontario government can borrow is fixed. As Ed Clark’s advisory council (the group behind the Hydro One privatization proposal) put it, “… it is clear that Ontario does have a limit on how much it can borrow; therefore, not selling assets has an opportunity cost: the investments that are not made.”
The problem is that it is not clear to anybody that the Province is anywhere near its borrowing limit. Proof of this is that the Council simply made the above assertion without providing a number as to what that borrowing limit is. Nor did it provide any evidence that the Province is anywhere near such a limit.
The truth is that International capital markets allocate financial capital on the basis of the interest rates they charge. Except for extremely poor private sector risks, there isn’t a maximum amount available to any given borrower – certainly no maximum for a government borrower in a developed country that is 2 years away from balancing its budget. If there are any concerns in those capital markets, then the markets might slightly increase the rates on money lent to Ontario – but even that is not happening.
On the second important assumption – that the sale proceeds will be used to finance other infrastructure with a more than 10 per cent rate of return to the province (i.e. the foregone revenue from the partial sale) – Ed Clark’s advisory council also provides no evidence. The Council says: “The government’s view, and one which we accept, is that the return on well-conceived projects will be higher than the return that the government would forego by selling Hydro One …”.
Clearly, if the Council had evidence that the transit and other investments would yield a return on investment to the province of 10% or more, it would have provided that evidence.
But it did not and simply alluded to the government’s communication rhetoric to justify the sell-off. If anything, investments in transit tend to cost governments down the road in that they require ongoing operating subsidies over and above the initial capital costs.
Third, the government assumes that the projected $4 billion in proceeds from the Hydro One sale that it proposes to re-direct towards transit and infrastructure, is the most economically efficient way of raising $4 billion for such investment.
But given that the net loss to the Ontario government as a result of a 60% sell-off of Hydro One would be $338.8 million per year, this is by no means clear.
For example, quite recently (2010), the Liberal government reduced the provincial general Corporate Income Tax (CIT) rate to 11.5% from 14%. This reduction is now costing the province approximately $2.5 billion in annual revenue. Even an increase in the CIT rate of 1% to 12.5%, would yield almost $1 billion annually – in other words, over 4 years the same $4 billion that the government says the Hydro One sell-off will yield for tansit.
And, of course, a permanent 1% CIT increase would be bringing in an extra $1 billion annually long after the first four years.
The Ontario government has made a huge mistake in deciding to go ahead with a 60% sale of Hydro One. Admitting that it’s wrong is difficult for all governments but as this Liberal government should have learned in the recent gas plant scandal, it’s better to admit you’re wrong earlier rather than later.