A bad deal, still going ahead

When Kathleen Wynne's Liberal Party was running for office in the Ontario provincial election last year, it said nothing about privatizing Hydro One, the publicly-owned electricity distribution network. As soon as her government took office, however, Wynne commissioned former banker Ed Clark to look at ways of "monetizing" key public assets, including Hydro One and the provincial booze monopoly, the LCBO.

It's reported that Clark's initial recommendation was that Hydro One should be retained in full public ownership -- which, as we'll come to in a moment, is the only logical conclusion that can be drawn. However, Wynne needed funds to pay for some of her election promises, including a big program of infratsructure investment, and she somehow managed to persuade Clark to endorse a plan to sell off a majority interest (60 percent) in Hydro One to private investors.

Both of the opposition parties are opposed to the sale; so are large swathes of the media and, it appears, most of the public. Now we learn that the province's new financial accountability officer (a post created by Wynne herself) is warning that the selloff will only improve the province's financial position in the year it banks the proceeds of the sale; after that, the loss of a portion of Hydro One's reliable revenue stream will increase the provincial deficit year after year, obviously adding to the provincial debt.

The media are reporting this as if it's a shock-horror revelation, but in fact it's just simple financial math. Returns on equity are always higher than returns on debt because of the greater risks that the equity holder is taking -- debt is a first charge on cash flow. The discrepancy between the two returns is particularly high at present, when interest rates are so low. What Ms Wynne is proposing to do is to shed a productive asset and the equity returns it generates, rather than use Hydro One's cash flow to support low-interest borrowing to finance her spending plans. It's hard to understand how she persuaded the hard-headed Ed Clark to lend his name to this.

There is, of course, another angle to the story. Ontario is now apparently the single most-indebted sub-national jurisdiction in the world, a dubious encomium which it recently inherited from California. Much of the debt was incurred by Wynne's predecessor as Premier, the unlovable Dalton McGuinty. Wynne is desperate to avoid seeming as fiscally improvident as McGuinty.  No doubt, if she were to propose borrowing to fund her spending plans, the same opposition parties that are castigating her for the Hydro One sale would be even more outraged.

Despite today's report, therefore, there seems little likelihood that the sale will be halted. It's distressing, though, to think of what it says about the state of the provincial fisc. In the past I've compared selling public assets to selling the furniture to buy gin. If the financial accountability officer's report is correct -- which it is -- then even if Ms Wynne sells the furniture in the next few months, she'll be even less able to buy gin in a couple of years time.