A self-imposed deadline to sell off more than $2-billion in government assets is forcing a tough decision on the Conservative government: sell when prices are low or hold the assets and put a return to balanced budgets at risk.
Federal revenues are already expected to take a significant hit due to the recent slide in oil prices, which has forced the government to shrink its projections for next year's surplus down to $1.6-billion. But other market factors are adding stress to the government's fiscal plans.
Last year, the Conservative government projected $2-billion in future revenue from asset sales, with $500-million coming for the current fiscal year ending March 31 and $1.5-billion in 2015-16, when the Conservatives are promising to return to surplus in an election year.
Last year's fall fiscal update specifically mentioned three assets "that are expected to be sold," including the government's remaining shares of General Motors, a bulk coal terminal in British Columbia called Ridley Terminals, and roughly 20,000 hectares of Crown land in southeastern B.C. known as the Dominion Coal Blocks because of its significant coal deposits.
With less than four months to go before the end of the fiscal year, none of these have been sold and the market value of all three assets has declined.
Ottawa has essentially "tied its own hands" by booking revenue from expected sales and is now in a self-imposed bind, says economist Don Drummond of Queen's University.
"I have always argued that [future] asset sales should not be booked in the budgets," said Mr. Drummond, a former senior Finance official. "They're too unpredictable both in terms of the timing of the sales and the value of the sales. … The proceeds should be booked if and when the sales have been made only."
Mr. Drummond says the government should abandon its timeline if it risks forcing decisions that are not in the best interest of taxpayers. On the flip side, Mr. Drummond noted the decision ultimately comes down to timing the market and there is no guarantee that coal prices or the value of GM shares will eventually rise.
The federally owned Ridley Terminals faced surging demand and was gearing up for expansion just two years ago, but those plans have been put on hold due to a drop in coal prices. A recent visit to the site by The Globe and Mail found no ships were waiting to be loaded and some conveyers used to stockpile coal had been halted.
Ridley chairman Byng Giraud suggested that selling now would be foolhardy.
"Coal prices have gone down, and you have to reassess if it is the best time to unload the asset. You have to get the best value for the taxpayer," Mr. Giraud told The Globe.
Declining coal prices are also a factor in the potential sale of the Dominion Coal Blocks.
In 2013, Finance officials indicated that Teck Resources, which has five open-pit coal mines in the area, was a likely buyer of the land.
The company's third-quarter report indicated that its gross profit from its coal business was down $230-million in the third quarter compared with a year ago largely because the price for coal has declined from $139 (U.S.) a tonne to $110.
A spokesperson for the company said it is interested in the property but gave no further indication as to the status of any discussions with Ottawa.
Similarly, the price of GM shares – purchased during the recession in support of the auto sector – has also declined since the government booked expected revenue from the sale.
When Ottawa last sold 30 million GM shares in September 2013, the stock was selling at $37. The government held on to 110 million common shares and about 16 million shares of GM Series A Preferred Stock, presumably on the assumption that it could land a better price over time.
The shares traded below $30 in October, but the price has been rising since, closing at $33.93 on Friday. Finance Canada briefing notes have shown the government keeps a close watch on developments related to GM and its share price given its holdings, which are a remnant of the government's auto-sector assistance package provided during the recession.
The shares are held by a federal Crown corporation called Canada GEN and one-third of the shares belong to the Ontario government. Canada GEN recently reported that the market value of the common shares decreased from $4.8-billion as of Dec. 31, 2013 to $3.9-billion as of Sept. 30, "as a result of a decrease in the market price of GM shares …"
Finance Minister Joe Oliver's November fiscal update booked new revenue from the sale of this year's 700-megahertz spectrum auction, which accounts for $300-million a year over 20 years. This reduces Ottawa's expectations from asset sales to $200-million this year and $1.2-billion next year.
Finance expressed confidence in the update that it would meet or exceed these targets, describing these amounts as conservative estimates that do not reflect the full value of the potential gains.
Finance spokesperson David Barnabe said the department stands by that view.
"We are confident the gain will be realized," he said.
With a report from Brent Jang in Vancouver