EDonomics 101

In yesterday's post about Ontario's planned sale of Hydro One, I wondered how Premier Kathleen Wynne had persuaded former banker Ed Clark to support the deal, given that he initially recommended against it. Evidently I wasn't the only one pondering this, because reporters put the question directly to Clark himself. His response can be found at the end of this article from today's Toronto Star. It's worth picking apart, because I get the clear impression that Clark is rationalizing to himself something that he doesn't really believe.

Here's the full quote; exegesis follows.

“Do you believe that infrastructure is an important element of a modern economy and will the economy perform better if we put the money into infrastructure?” said the Bay Street tycoon.

“My personal view is that the rate of return for infrastructure is higher than the rate of return that we’re in a sense getting compensated for when we sell these shares, so the province is making money — it may not be the provincial government is making money.”

• "Do you believe that infrastructure is an important element of a modern economy..."

 Absolutely no problem with that!

•  "...and will the economy perform better if we put the money into infrastructure?" 

Well, that depends on the infrastructure you put the money into. Is the $480 million that Ontario spent to jerry-build a train to the Toronto airport that runs 90 percent empty making the economy perform better?  How about the long-mothballed Mirabel airport north (waaaay north) of Montreal? It's obviously not going to be Ed Clark's decision where the money gets spent, but given the track record of Canadian governments in choosing where to invest, we might well be better off if it was.

• ....said the Bay Street tycoon. 

Oh, please! Clark was the very well compensated CEO of TD Bank but he was never the owner of the company, which is how I normally think of a tycoon. He's always been left-of-centre politically, which is why he's giving his time free of charge to try to help the Wynne government address some of its intractable financial issues.

• "My personal view is that the rate of return for infrastructure is higher than the rate of return that we're in a sense getting compensated for when we sell these shares...."  

That starts very poorly -- you'd hope that there was more than a "personal view" on the relative rates of return on infrastructure and Hydro One -- but of course, whether Ed Clark is right about that depends on what exactly the Province spends the money on, and as I just noted, that's out of Clark's hands.

• "...so the province is making money -- it may not be the provincial government is making money". 

Right; returns on infrastructure investment, unless you capture them directly (through tolls on a new highway, for example), don't tend to accrue as returns to the body making the investment. Instead, as Clark is suggesting in the final phrase, the gains accrue more broadly (and largely non-measurably) in the form of greater overall prosperity.

All in all, you may be thinking, Ed Clark's explanation for his position holds up quite well. In what sense, then, is he (to quote the opening paragraph of this post) rationalizing to himself something he doesn't really believe?  Well, even if the returns on the infrastructure investments are higher than the return the Province currently earns from Hydro One, the fact remains that this is not the cheapest or most cost effective way to finance those investments. Selling a chunk of Hydro One is equivalent to the Province borrowing money at an equity rate of return, at a time when its own borrowing costs in conventional forms (via bond issuance) are much lower than that -- indeed, at an all time low.

That's what the Province's financial accountability officer is saying, in effect, when he says that the Hydro One sale will provide only a short-term boost to the provincial finances. Both the deficit and the debt will rise in the medium term as a result of the sale, unless the provincial government takes further steps -- but of course, if it were prepared to take those steps, it wouldn't be selling off part of Hydro One, would it?  Ed Clark, the highly experienced financier, undoubtedly knows this, and has surely imparted it in private to Premier Wynne, but like a good (if unpaid) team man, he's trying to stand behind the decision that the politicians have made.