Selling off our public assets makes no sense for Toronto
Many of them generate stable flows of revenue that the city will lose in these one-shot deals.
by Toby Sanger and Jim Stanford
The list of Toronto mayoralty candidates running from the conservative side of the spectrum is getting pretty long. Even longer is the list of public assets they are promising to sell off should one of them win the election.
Toronto Hydro, the downtown heating and cooling system, parking meters, parking lots, garbage collection, transit routes, even ski hills and campgrounds have all been offered up by business-friendly candidates, all promising to downsize the city out of its fiscal problems.
And it's not just in Toronto that "For Sale" signs are being hung on publicly owned assets. The financial crisis and resulting recession left a legacy of deep red ink for all levels of government: federal, provincial and municipal. (Don't forget, the downturn was caused by business, not by government. Perhaps the private sector doesn't know best, after all.) Ottawa and Queen's Park are both studying the privatization of key Crown corporations, supposedly to fight the deficit that the market not government created. These would-be mayors want to move much faster. If one of them wins office, the auctioneer's hammer will be falling in very short order.
Addressing deficits through a one-time fire sale of public assets is politically attractive to conservatives, who think government's economic role should be minimized, deficit or no deficit. But what about the economic and financial case for privatization: does it make any sense? Far from solving our current deficit woes, privatization will in fact make things worse.
From a balance sheet perspective, simply selling an asset cannot improve the government's net position. Yes, the proceeds can pay off some debt. But assets have declined, too. The government's net indebtedness (debt minus assets) is unchanged. There's no change in the fundamental fiscal sustainability of the government and no savings from lower interest rates.
From a cash flow perspective, the implications of privatization are even worse. Most public assets generate stable flows of revenue from sales of goods and services, fees and other sources. By selling the asset, the government forgoes that future revenue stream.
If the lost revenue is greater than the reduction in interest payments resulting from the one-time reduction in debt, then privatization undermines the government's long-run fiscal balance.
Consider the case of Toronto Hydro, the crown jewel of the city's asset base. The city's equity stake in Toronto Hydro (valued at around $1 billion) continues to be a solidly profitable investment. According to the last five annual financial reports, the city has earned an average return on equity (from Toronto Hydro's continuing operations only) of close to 10 per cent a year. And since Toronto Hydro is closely regulated by the Ontario Energy Board, decent returns are assured in future years. This healthy and stable rate of profit is significantly higher than the interest rates paid by the city on its own debt (which can be as low as 2.5 per cent).
Selling off Toronto Hydro and using the proceeds to reduce city debt would thereby produce a net fiscal loss in future years of $50 million per year or more, based on the difference between Toronto Hydro's profits and the city's own interest rates. That can mean only one thing: higher property taxes or public service cuts in the future, once the one-shot proceeds from the sale have been spent.
But adding insult to injury, private ownership of the municipal utility would certainly lead to higher electricity prices for Toronto residents down the road. After all, investors aren't clamouring to buy the company out of the goodness of their hearts; they are eyeing even bigger profits down the road. So Torontonians pay twice: once in taxes, because the city lost a money-making asset, and then again on their utility bills.
Selling off Toronto Hydro makes sense for the Bay Street brokers who would haul in enormous commissions, skimming off some of the cream from this fine asset for themselves. But it makes no fiscal sense for the city. Moreover, privatization would undermine Toronto Hydro's ability to fulfill other public policy functions like its vaunted conservation programs. What private company would encourage consumers to buy less of the product it is selling?
After all, most public corporations were originally created to serve a broader public policy goal. In cases of "natural monopoly" (such as hydro), public ownership prevents private companies from gouging the public.
It's this natural monopoly power that makes Toronto Hydro so attractive to private investors, especially if privatization is followed by deregulation. Who knows how high rates will then rise?
Toronto Hydro was established a century ago thanks to the leadership of William Peyton Hubbard, Toronto's first black city councillor and the son of a freed slave. At that time, private power companies provided inferior service and gouged consumers. Hubbard fought for public democratic control of essential services like water and hydro, to ensure quality service and affordable rates. He would roll over in his grave if 100 years later we abandon "power to the people" and revert to "profits for the few."
The current rush to sell public assets is not driven by economics, nor by the public interest. It is driven by politics and the hunger for private profits. Financiers hunger for "sure-thing" investment opportunities like Toronto Hydro instead of building new private companies from the ground up; it's much easier to buy out healthy public ones.
Business-friendly political candidates hope to advance this agenda, invoking simplistic phobia of deficits and pretending we can magically escape debt through asset sales. But if we're concerned for the long-term fiscal health of our cities, let alone for the well-being of our communities, we will firmly resist their siren call.
Toby Sanger is economist with the Canadian Union of Public Employees. Jim Stanford is economist with the Canadian Auto Workers, and was a member of Mayor David Miller's Independent Fiscal Review Panel. This article is reposted with permission and originally appeared in The Toronto Star.
Posted: April 13, 2010
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