By Adrian Morrow, The Globe and Mail, (Oct. 29, 2015) – Ontario’s budget watchdog is warning that the planned privatization of Hydro One will cost the government up to $500-million every year in lost revenue, drive up the province’s debt and “worsen” its fiscal position.
The explosive report from financial accountability officer Stephen LeClair on Thursday further stoked the firestorm of opposition to the controversial sale, which Premier Kathleen Wynne is undertaking to raise new funds to pay for transit and other infrastructure.
While the province will get some quick cash to spend on transit, Mr. LeClair found, it will lose money in the long run.
“The province’s fiscal position will deteriorate compared to if they didn’t undertake this sale,” he told reporters at Queen’s Park. “The sale of Hydro One will have an immediate improvement to the province’s balance sheet, but because of the loss of net income that results from the partial sale of Hydro One, there will be subsequent worsening of the government’s fiscal position relative to if this sale had not occurred.”
Ms. Wynne is planning to sell 60 per cent of Hydro One on the stock market, starting with a 15-per-cent initial public offering next week. The government hopes to raise $9-billion, of which $4-billion would be put toward transit and the rest used to pay down debt.
The massive utility, which controls nearly all electrical transmission in the province and a large chunk of distribution, successfully priced its IPO at $20.50 per share on Thursday. That’s near the high end of its marketing range, proving there was substantial investor demand for the deal. The IPO is expected to raise $1.83-billion for the province. The publicly traded shares will start trading on Nov. 5 under the symbol H.
Mr. LeClair estimates the province’s annual loss from the sale will ultimately be between $300-million and $500-million. The loss will come largely because Ontario will be entitled to only 40 per cent of Hydro One’s $750-million annual dividend, instead of taking in the full thing as it does now. The province will also lose money, he said, because it will immediately forfeit $100-million in annual payments in lieu of taxes but the company will not start paying corporate income tax until at least 2020.
Mr. LeClair said the government also refused to show him its calculations on the financial effect of selling Hydro One. “They responded that the information was cabinet confidence,” he said.
The Hydro One report is Mr. LeClair’s first since becoming the province’s first ever financial accountability officer earlier this year. The FAO is a non-partisan watchdog appointed by all three parties in the legislature, analogous to the parliamentary budget officer at the federal level.
Ms. Wynne pushed back against Mr. LeClair’s assertions, arguing that the economic stimulus of building more transit – and the resulting boost to tax revenue – would more than make up for the government’s loss in revenue from Hydro One dividends.
“The benefits, the economic benefits of the investments that we’re going to make, I’m convinced they will outweigh that long-term change in the revenue,” she said in a fireside chat with Paul Waldie, The Globe and Mail’s business editor, at the Ontario Economic Summit in Niagara-on-the-Lake Thursday. “We are very, very convinced that making these investments will make us a much more attractive jurisdiction, will allow us to compete with the jurisdictions that we are already competing with and will allow businesses here to expand.”
When Mr. Waldie asked whether she intended to go ahead with the Hydro One privatization despite Mr. LeClair’s report, Ms. Wynne said: “It’s going, yeah.”
Finance Minister Charles Sousa contended that Hydro One’s private investors would push the company to become more efficient and profitable, which would lead to higher dividends.
“The appreciation of value of that corporation would provide for greater opportunities for shareholders, of which the province of Ontario and the taxpayers will continue to hold,” he said.
Asked whether he had any calculations or other information to back up these assertions, Mr. Sousa said he could not release them because they might interfere with the IPO. The government is in a “quiet period” ahead of the first share sale.
Mr. LeClair said that Hydro One’s dividend would have to more than double to make up for the money the province will lose from giving up 60 per cent of those payments to private investors.
The privatization is broadly unpopular, with both opposition parties and several unions campaigning against it. A string of polls has also shown a majority of Ontarians are opposed.
Progressive Conservative MPP Vic Fedeli said the privatization would result in “short-term gain for very long-term pain.”
“This is an absolutely disastrous deal for the province of Ontario,” he said. “This is all about fluffing up the government’s books for the next couple of years in advance of the election … we’re going to see some good numbers for a couple of years, then it is a downhill slide.”
NDP Leader Andrea Horwath told the legislature the sell-off is “insane.”
“This is a terrible deal and it makes no sense whatsoever,” she said.
The privatization did, however, prove popular among investors.
Of the shares sold in the IPO, retail investors purchased roughly 40 per cent, more than the 25 per cent that was initially set aside for them. The rest goes to institutional buyers, who the province hopes will stay on as long-term shareholders. Because the retail portion is higher than originally projected, Hydro One will have to pay its underwriters more in fees. Sales to institutional investors came with a 1-per-cent commission, while sales to retail investors have a 3-per-cent fee.