Governments across the world are faced with a terrible tradeoff between austerity and public services. Stimulus programs have run their course but tepid growth has outlasted the ability of sovereign and sub-sovereign balance sheets to continue deficit spending. This is particularly true in the case of Ontario, with its substantial deficit and slow growth numbers. Moreover, even with a return to growth, Ontario faces a significant structural deficit.
Or this is what conventional wisdom would have you believe.
Tradeoffs remain intractable because they are supported by underlying assumptions that are not challenged. Great strategists do not accept tradeoffs but seek to “break” them by thinking in a different way than what convention dictates. The question is not whether we must have austerity or public services, but rather, what can be done to boost public service delivery without borrowing more money. Progressive Conservative Leader Tim Hudak provides one such tradeoff-breaking idea in his new energy white paper: the sale of Hydro One and Ontario Power Generation to Ontario and Canada’s pension funds.
Monetizing government assets is nothing new. As the OECD reports, hundreds of billions worth of public utilities have been monetized since the early 1990s. The previous PC governments sold several assets, including the 407. The current Liberal government has learned from past sales and is deploying new structures such as retaining large equity stakes or royalties as in the case of Teranet (see page 89 of the latest provincial budget for such a comparison). The current government has put its collective mind to monetizing all four of the major crown assets though the proposed “ Supercorp.” The sale of the Ontario Northland Transportation Corporation and the rationalization and monetization of the Ontario Lottery and Gaming Corporation are continuation of this trend.
The proposal to partner with Ontario pension funds is innovative in several respects. These pension funds are considered some of the most advanced managers of large pools of capital in the world. In the area of infrastructure investment they are the most advanced globally. So much so that the British government, faced with very similar problems to Ontario, is trying to attract Ontario pension funds to buy and develop its assets. As the Financial Times recently wrote, Ontario based funds took “bold” steps to invest in infrastructure over a decade ago. Significant British infrastructure assets, including Scotia Gas Networks, Birmingham and Bristol airports and the high speed train link between the Chunnel and London, are now owned by Ontario based funds.
While Ontario funds own significant foreign infrastructure assets, they own relatively few Ontario assets, as the head of the Ontario Municipal Employees Retirement System recently noted. In his speech to the Ontario Energy Association, Michael Nobrega went on to elucidate a four-step plan that would see large pools of Ontario capital “collaborate” to re-capitalize and re-generate Ontario’s energy infrastructure:
“The time has arrived to put the financing of our energy future on a competitive basis in a global context … especially compared with the U.S. and U.K. As a major pension fund, we have the staying power, the financial resources, tight risk management practices and a propensity for owning assets long-term to advance Ontario’s socio-economic wellbeing.”
“Collaborating” with Ontario’s pension funds would allow for a reinvigorated and re-capitalized energy sector free from the political machinations that have destabilized the system. Using the Teranet transaction as a model, the government would receive an upfront payment of billions of dollars, as well as an ongoing royalty and a continued ownership stake that would increase its value over time. Most cleverly, the success of a monetized OPG and Hydro One would be funnelled back to Ontario taxpayers through the pension funds, alleviating our pension fund deficits.
The proceeds could be used by the government to pay down debt, fund the essential transformation of the Ontario and broader public service, and build several GTA subway lines (for example). If run by Ontario pension funds, OPG or Hydro One could prove a formidable global player in the energy sector. When the European Union opened its electricity markets in the 1990s, Electricite de France went partially public and now is the second largest utility company in the world. Partially privatizing OPG or Hydro One would create the scale, balance sheet and mindset necessary to grow internationally.
Ontario need not choose between such crushing tradeoffs as public services or bankruptcy. Instead, it must turn to ideas that find another path, or it will be doomed to sclerotic economic growth and continued austerity. In this proposal, Tim Hudak has put forth an idea that cuts through the negative tradeoffs of status-quo thinking.
J.C. Bourque is a business strategy consultant in Toronto. He has worked on several campaigns for the Progressive Conservative Party of Ontario.