Ontario ponders sale of Crown corporations to beat down deficit
Province has hired two banks to look into prospect of privatizing government-owned businesses, including liquor and gaming companies
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Published on Tuesday, Dec. 15, 2009 8:57PM EST
The cash-strapped Ontario government is looking into the sale of all or part of its collection of Crown corporations, including the provincial lottery company and the retail monopoly on liquor sales, to raise cash to close a $24.7-billion deficit this year.
The Liberal government of Premier Dalton McGuinty recently hired two banks with experience in privatizations, CIBC World Markets Inc. and Goldman Sachs Group Inc., and charged them with writing a blueprint for possible privatization of agencies, investment banking sources said. The sale candidates include icons such as Hydro One Inc., the Ontario Lottery and Gaming Corp., the Liquor Control Board of Ontario and Ontario Power Generation, said the bankers, who asked to remain anonymous because the talks with the government are private.
The planned time frame for the initial study is short, just a couple of months, and then the government can decide whether to go ahead with any sales.
“The politicians have said they are willing to look at anything, that they don't want to prejudge the outcome,” said one banker with knowledge of the government's plans. He said one concept being discussed is creating a “super-corporation” that would hold a number of provincially controlled companies, then selling a stake in that to public investors.
Ontario, like provinces across the country, is coping with a huge drop in government revenue because of the recession that has left it with the prospect of yawning deficits for years to come. Without a dramatic and unexpected pickup in economic growth, there are few palatable options for closing the budget gaps, leaving governments weighing a combination of service cuts, tax increases and asset sales.
The New Brunswick government recently agreed to sell most of the assets of its provincial power utility to Hydro-Québec for $4.8-billion. The controversial sale was billed as a way to reduce debt. But it appears to have backfired on the Liberal government of New Brunswick, with a poll showing the party's support is sliding.
The Ontario government is three months into a review of how to best deliver services and since the last budget update, Finance Minister Dwight Duncan has said the government is looking at how to best manage the assets it owns.
“These assets are worth billions and billions of dollars, and I think it's incumbent upon us to look at all of them and to make sure that we're maximizing them,” Mr. Duncan said in October after tabling the government's fall economic statement. “Don't draw conclusions at this point about that sort of undertaking.”
A spokesperson for Mr. Duncan declined to comment Tuesday on specific plans for Crown corporations.
Any plan to sell Crown corporations that touch the lives of every Ontario voter would likely run into opposition on a number of fronts, including from unionized employees. In 2001, Ontario's then-Conservative government planned a $5-billion initial public offering of Hydro One, which owns many of the power lines crisscrossing Ontario, but that was derailed, in part by a union-backed court challenge.
Bay Street sources said governments regularly look at asset sales without pulling the trigger and there is considerable skepticism among bankers that this time will be any different.
However, the potential paydays for the government could be huge should it move ahead. For example, the LCBO's valuation could top $10-billion, based on the trading prices of private liquor stores in Alberta. The government could also seek to keep control of some of the revenue streams from any assets it sold.
If Ontario does decide to sell Crown corporations, there will be no lack of buyers. The dependable infrastructure assets currently owned by provincial taxpayers are sought after by income-hungry individual and institutional investors, while the LCBO and gambling properties are viewed as steady businesses that are recession-resistant.
Sources say pension funds such as OMERS, which pays for the retirement of provincial employees, have already expressed an interest in the 604-outlet LCBO. The company made $1.4-billion in profit in 2008, almost all of which was handed over to the government in the form of dividends, and it has seen its profit rise for 15 straight years.
“The most attractive asset is Hydro One, if they do decide to sell, because it's clean, it's profitable and there's already a sense of familiarity with the business,” said one investment banker with close ties to the Ontario government.
The other assets are more problematic for buyers because each has perceived problems – though the flipside of that is they would be more attractive for the government to shed. The banker said Ontario Lottery and Gaming, or OLG, has “governance issues” in the wake of scandals, while Ontario Power Generation's three nuclear stations have hard-to-quantify legacy costs, and the LCBO is considered “too political” to sell outright, due to public concerns with control on sales of spirits and wine.
A source close to the provincial Liberals say Mr. McGuinty is disenchanted with OLG, and would welcome an elegant exit from the casino and lottery business as long as it guaranteed the province could continue to receive income from it. The agency put $1.7-billion into provincial coffers last year.
“There are all sorts of capable casino and racetrack operators,” the source said. “The Premier sees no reason to be in those businesses.”
If the sale of entire Crown corporations is deemed unacceptable, Ontario could also opt to sell minority stakes, sources say, or sell individual assets such as power plants or transmission lines out of a large utility. Ontario Power Generation already has joint ventures on plants with private-sector companies such as TransCanada Corp.
The banks hired to look into potential sales have a background in helping governments sell assets. Both CIBC World Markets and Goldman Sachs were involved in the scuttled initial public offering of Hydro One, and the two investment dealers have worked on a number of other government privatizations, including the sale of British government-owned utilities.
