Let's start with two indisputable facts: (1) Government is generally not any good at running businesses, and (2) the Greater Toronto and Hamilton Area, population seven million and growing, needs more and better mass transit. And now, time for a political pop quiz: Can you combine those two facts into a winning platform? Premier Kathleen Wynne's Liberal government thinks it can. We're not so sure.
On Thursday, the government announced its plans to "liberalize" beer sales in Ontario – which is in reality a move to turn all things beer into a central planning exercise worthy of the Soviet Gosplan. Competition is not promoted; instead, it is outlawed. There's not much respect for Indisputable Fact No. 1 in any of this.
But at the same time as it was watering down everyone's beer, the government also announced its intention to sell off a majority stake in Hydro One, the provincially owned electricity transmission system. This is at least a step toward getting government out of the business of business.
Ms. Wynne aims to take the money from a sale and use it for public transit. By promising to sell off 60 per cent of Hydro One and its stake in a local distributor, the government has magically conjured cash out of thin air: as much as $9-billion, seemingly at no cost.
If only it were so simple, or so cost-free.
Hydro One is the distributor that owns the province's electricity wires – not all of them, but the most important ones. It's what economists call a natural monopoly. There will never be multiple, competing wires running into your home, or across the province. In other words, this is a steady, stable business – a regulated utility, earning a regulated rate of return.
Former TD Financial Group CEO Ed Clark's report calling for partial privatization puts Hydro One's total value at between $13.5-billion and $15-billion. Selling off 60 per cent could net $9-billion. The money will be funnelled into the government's priority item – public transit. Again, seemingly at no cost.
When someone shows you a deal that looks too good to be true, read the fine print.
The Clark panel notes that an offering of shares in Hydro One "would be highly attractive to the market as a dividend-paying investment." No doubt. But here's the rub: Hydro One is already a dividend-paying investment – paying 100 per cent of its dividends to the government of Ontario. The reason private investors will pay $9-billion up front is because they'll be entitled to 60 per cent of those dividends, forever.
There are good reasons for privatizing Hydro One, and giving up that future income. Private investors would pressure the company to become more efficient. Overseen by a tough regulator, the synergy of public and private could be a very positive thing.
That's why we support the plan to sell off most of Hydro One. What bothers us – and should bother you – is the wishful-thinking accounting being used to sell the deal. Up-front benefits abound but future costs, in terms of lost revenues, are not mentioned.
There's also the question of how money raised today will be spent tomorrow. In a meeting with The Globe and Mail editorial board on Friday, Mr. Clark said a sale will allow the government to redeploy the money to higher-value investments. Businesses do this all the time: sell off a low-return asset; buy a higher-growth one. Perfectly logical.
But that's not exactly the Wynne government's plan. Instead, it is going to unlock value from one money-making public enterprise and put it into public transit – a non-business run on vote-buying rather than business principles.
On Friday, the government announced it would be spending $13.5-billion on a massive expansion of GO Transit. Serving the 905 belt around Toronto, and beyond, the program should leave Liberal politicians smiling. It also appears to use up nearly all of the money the Wynne government earmarked for transit projects. That's likely to leave many more necessary and cost-effective, but less politically favoured, transit improvements high and dry. Which brings us back to Indisputable Principle No. 1: Governments have a terrible history when it comes to making good business decisions.
It is clear that, while the Toronto Area needs more transit, some parts of the megalopolis – the most urban parts – have by far the greatest demand, and the best business case. For example, on an average business day, Toronto's busiest subway station serves twice as many passengers as the entire GO train system. But public transit in Ontario is not a business, run on business principles. It's a political sinkhole, and the great sucking sound is politics.
More often than not, it leads to the Sheppard subway, or ditching a fully-funded Scarborough light rail line in favour of a costly, unnecessary subway. The driving force is not customer demand sufficient to turn a profit. It is voter demand, sufficient to get elected.
It's enough to drive one to drink. Bottoms up.