Selling the furniture to buy gin

Many years ago, at the height of the privatization mania that swept around the world, a colleague of mine scornfully described the practice as "selling the furniture to buy gin". You were trading in valuable assets for one last fix of a guilty pleasure you couldn't really afford. Not that this deterred anybody back in the day: enthusiastically led by the Thatcher Tories in the UK, governments all over the globe sold off everything from airlines to utilities to the highest bidder.

Privatization is not so much in vogue nowadays, though it's still favoured as a policy option for cash strapped governments: one of the demands that the so-called "troika" made of the Greek government is that it should sell off some of the more idyllic Aegean islands to foreign investors.  And there are few governments around the world more desperate for cash than the Province of Ontario. In the wake of years of spending that would shame a drunken sailor* and some ill-considered tax cuts, Canada's most populous province is saddled with a huge deficit and debt that the recently re-elected Liberal government has pledged to rein in by 2018.

Spending cuts won't do the job, and significant tax hikes are a no-no. so the government is looking at selling off (or "monetizing", as it prefers to say) some publicly-held assets. Some of what's on the block clearly belongs in the private sector -- the liquor monopoly, for example -- but there are other assets that most Ontarians seem to prefer to keep in public ownership, if polls can be believed.

The biggest of these "crown jewels" is Hydro One, a successor corporation to the former Ontario Hydro, which was broken up (partly with a view to eventual privatization) more than a decade ago. Hydro One handles almost all of the high-voltage transmission in the province, and also has a couple of subsidiaries that function as local power utilities. Those subsidiaries are certain to be sold off, but it now appears that the government is looking at options to sell off a big chunk of Hydro One itself as well.

Truth to tell, I don't have a strong opinion either way here: I can make a case for keeping companies like Hydro One in the public sector, but I can equally make a case for why it would be better off in private hands. It's clear to me, however, that there's a very good chance that the Liberals will screw this up -- and all to raise an amount that is really fairly insignificant in the contest of the province's fiscal problems.  Here are a few considerations:

•  Screwing up the energy sector is what the Liberals do best. The cancellation of planned gas projects before the last provincial election but one, a decision made entirely for partisan advantage, cost taxpayers over a billion dollars in contract breakage and other fees.  Before that debacle, the Liberals embarked on a push for renewable energy that has led to skyrocketing electricity bills for both households and businesses. This has contributed in no small way to the meltdown of Ontario's manufacturing sector.

•  It appears that the favoured approach will be a selloff of a portion of Hydro One, rather than the whole. That portion could be as high as 60%, with the province retaining 40%.  There would also be restrictions on how much any other shareholder could own. This is supposed to protect and reassure the public, but of course if the other shareholders banded together they could outvote the government on key issues. The government could protect itself by retaining a so-called "golden share", as happened in some UK privatizations, but of course, if it does that, there's no obvious reason not to sell off the entire company.

•  No sane investor really wants to be a junior partner with government anyway, so the Province's insistence on retaining a big piece of the pie will inevitably reduce the amount that can be obtained for whatever part is sold. The Province's assurance that the existing regulatory regime will remain in place will have the same effect -- and without providing any real comfort to consumers who've seen power prices soar under that same regime over the past decade. 

•  If Hydro One is valued at $16.5 billion (CAD), as experts seem to believe, then sale of a 60% stake would raise $10 billion for the provincial treasury. Chunky, right? Well maybe, but consider that the Province's outstanding debt is $350 billion, and the projected annual deficit for the coming year is $12.5 billion. You'd be selling off a majority shareholding in an important piece of infrastructure that's been in public ownership for a century and more, and not even raising enough money to keep you in gin or whatever your poison may be for even a year.

There's going to be a big brouhaha if the privatization plan goes ahead. There'll be knee-jerk opposition from media outlets such as the Toronto Star; Hydro One's unions will be outspokenly opposed; and there are even signs that the supposedly right-wing Tory opposition may opportunistically come out against a sale that you'd think they would be ideologically likely to support. The process, if it happens, is likely to be formally announced as part of the provincial budget, expected in May. The Liberals have an overall majority, so they'd be able to force this through, but the political costs are likely to be severe.


* No insult to inebriated matelots intended: I'm aware that, unlike politicians, sailors on shore leave spend their own money.