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Customers line up at an Ontario liquor outlet (J.P. Moczulski/The Canadian Press)
Customers line up at an Ontario liquor outlet (J.P. Moczulski/The Canadian Press)

Bryne Purchase

Good time to sell government assets? Depends on the asset Add to ...

Governments everywhere are confronted with huge deficits. Economists believe that, in many cases, these are structural deficits - that even in economic recovery, they are unlikely to be eliminated by corresponding revenue growth and the end of recession-related spending.

In this tough fiscal environment, some are urging asset sales. In Toronto, for example, some have suggested the sale of Toronto Hydro. Ontario may be considering the sale of all or parts of Hydro One, Ontario Power Generation, the Ontario Liquor Control Board and the Ontario Lottery and Gaming Corp. New Brunswick has negotiated a potential deal to sell NB Power. The federal government is also reviewing asset sales, such as the power division of Atomic Energy of Canada Ltd.

How should the public evaluate potential government asset sales? Will they help to resolve structural deficits? Will economic performance improve? The answer depends on the nature of the asset.

Take, for example, Toronto Hydro and Hydro One. Technology makes them natural monopolies. It makes no economic sense to have 10 or 20 competing electric wires running through the streets or countryside. Profits are formally regulated by an independent tribunal to ensure that they approximate what would happen in a competitive marketplace.

If a government sells this kind of asset to a private firm, very little changes. There is no evidence that a rate-regulated private monopoly performs better or worse than a rate-regulated publicly owned monopoly. Nor does such a sale address a structural deficit. One-time revenues do nothing to change the underlying and ongoing fiscal problem of too little tax revenue or too much program spending.

In short, such sales would not appear to be in the public interest. They solve no problems but come with transaction costs.

There are, of course, interests that are served by this type of asset sale. They allow the day's political leaders to put off the unpleasant tasks of cutting program spending or raising taxes. Other beneficiaries include the host of financial, legal and political consultants who will personally benefit from serving as advisers to the transaction.

Government businesses, such as Ontario's LCBO and OLGC, are in another category. They are not natural monopolies. They are government-created monopolies, and they have no independent regulatory oversight limiting their profitability. But if they were sold as monopolies to private enterprise, then some new formal regulatory framework would have to be created to protect the public from exploitation by the new private owners.

In short, their monopoly value is likely maximized if left in government hands. Structural deficits could be made worse if they are sold. Moreover, many believe that monopoly pricing by government, by reducing consumption, is socially desirable for alcohol and gambling.

Ontario's OPG and the federal AECL are in yet another category. It is possible that a sale of these assets could help to reduce structural deficits and improve economic performance. Both companies could operate in a competitive marketplace but are currently used by governments to achieve other public purposes.

AECL's power reactor business already operates in a competitive international marketplace. It is an ideal candidate for sale, not because it would yield much one-time cash value but because it would cease to be a drain on future government finances in subsidies to domestic nuclear power technology.

Ontario has used OPG's assets to subsidize the price of electricity. Ending this practice would raise revenue. The government could also sell the assets and move to create a competitive market for electricity generators. These actions would improve economic performance on many fronts.

In short, there is no single answer to whether asset sales are in the public interest. But these are very significant and largely irrevocable decisions. And one thing is certain: Neither ideology nor the short-term interests of current governments or consultants should be allowed to dominate.

To guard against this, we should adopt a convention that all major government asset sales be subject to a truly independent review, with the results of such review made public before any final decision is made.

Bryne Purchase is an adjunct professor at Queen's University and former Ontario deputy finance minister.

 

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