Ontario’s Liberal government has a problem. Ed Clark may have a solution.
The TD Bank CEO answered the call in the spring budget for advice on how Queen’s Park can dig itself out of debt. Now, his privatization panel is digging deep into the government’s books to decide what public assets should be sold — or slimmed down.
On Friday, Clark will publicly lay out the main questions posed by his panel of experts:
How do we get a handle on the LCBO? And how do we free our alcohol sales from the iron grip of the foreign-owned Beer Store monopoly?
How do we jolt Hydro One’s transmission lines into a more cost-effective electrical utility?
Merely by asking these questions, Clark will be answering them in advance.
Sources say his expert panel — which includes representatives from across the political spectrum — believes it’s time to unlock more value from the transmission of electricity. And more cash flow from the sale of booze and beer in Ontario.
Hydro One is a hydra-headed beast carved out of the old Ontario Hydro in the late 1990s, when a then-Tory government first attempted — and aborted — privatization. Now, Clark’s panel believes Hydro One should refocus on its high stakes, high voltage mission of electricity transmission.
That means unloading its local distribution operations across rural Ontario and the north, to allow for consolidation in the sector. Beyond the big local operators such as Toronto Hydro and Hydro Ottawa, dozens of smaller operators lack economies of scale to achieve efficiencies.
Ontario’s other government-owned utility, OPG (Ontario Power Generation) produces roughly half of our nuclear power and runs most of our hydro dams — and does so at a lower rate than its competitors (notwithstanding its overly generous pension plans). Why sell what’s working well?
The panel doesn’t see any obvious opportunities to sell off OPG — apart, perhaps, from its aging, mirrored headquarters building across from Queen’s Park. (Selling off OPG’s headquarters would provide a neat, tragic-comic symmetry for a government that just spent $307 million to bail out the gleaming MaRS Phase II building on the other side of University Ave. — an unintended “asset swap” that amounts to selling off one house of mirrors for another.)
Privatization isn’t as simple as it sounds, economically or politically. The NDP has vowed to oppose any sell-off of electrical utilities. Other analysts aren’t sure the economic payoff is so attractive.
When former TD chief economist Don Drummond prepared a landmark report on government operations in 2012, he expressed skepticism about selling off crown jewels to private operators, who then reap large profits by cutting costs. If those future earnings streams are to be auctioned off, they had better be at a commensurately high price — or the government might as well implement those efficiencies on its own.
“I didn’t see privatization as a magic solution and something that would make a big contribution in the short term,” Drummond told me.
The third big Crown corporation on the panel’s radar is the LCBO, which the government has already declared is not for sale. As a monopoly, it is worth more intact than fragmented, because it dominates the market. Its annual dividend of $1.7 billion delivers guaranteed cash flow to the treasury (not counting tax revenues).
Sources suggest the LCBO has identified as much as $300 million in potential increases to the treasury through a combination of more nimble tax rates and job classifications that are updated (or downgraded — not so easy in a unionized environment). Another obvious area is outdated procurement methods, first criticized by the provincial auditor general: bizarrely, the LCBO first sets a price category — then invites suppliers to meet (but not beat) that price.
But the opportunities go beyond booze to beer, Clark said in an interview last month: “What is clear is you can’t look at the LCBO without looking at The Beer Store and the private wine retail stores.”
But The Beer Store is not government-owned like the LCBO. It’s controlled by three large multinational brewers that control about 80 per cent of the market because other private retailers are barred from competing; the LCBO sells the other 20 per cent.
But if the multinational brewers enjoy a de facto monopoly on retailing, shouldn’t they pay a licence fee to the province for the privilege? What’s the value of The Beer Store’s sweet deal?
It’s a question Clark’s panel is kicking around. And there are other ways of nibbling away at the monopoly.
In 2000, the Tory government of the day directed the LCBO to negotiate a “Framework Agreement” with The Beer Store. Jeff Newton, a spokesperson for The Beer Store’s owners, says the deal “codified” past practices by limiting the LCBO to selling only six-packs of beer.
The agreement has no built-in termination clause, but allows either side to give six months’ notice to cancel. But would The Beer Store demand compensation or threaten litigation in its discussions with Clark?