Selling Toronto Hydro is no pollyanna

Fixing Toronto – Part Six

I see that one of Toronto’s mayoral candidates has a solution for Toronto’s financial woes: sell Toronto Hydro.

On the face of it, privatizing assets that need not be publicly-owned makes sense. It was only a few years ago that federal politicians thought Canada needed to own Telesat, Canadair, de Havilland, Petro-Canada, Air Canada, Suncor, and the Business Development Bank of Canada. But the Hon. John McDermid and Rt. Hon. Don Mazankowski got to work. Today, the only one hanging on to crown protection is the BDC (which also happens to be the highest profile advertiser in the Ottawa airport right now — wonder who their advertising is directed at).

The City of Toronto has a reported debt of $2.4 billion. I can imagine that would get partially wiped away if Toronto Hydro is auctioned off; now that the income trust market is gone an IPO won’t likely generate the highest price. Default to your standard trade sale. But it should surpass $1 billion based upon 2008 net of ~$46 million.

But, as public policy, is this the right move? I’m not so sure. I haven’t checked the carrying costs on that debt, but let’s imagine Toronto pays 5%. That’s an annual interest bill of $120 million; a decent chunk of the projected $500 million City budget deficit. However, for the 2008 fiscal year, Toronto Hydro paid the City dividends of $116 million (of which $75 million arose from an asset sale). As a lump sum, it almost entirely obviates my carrying cost guesstimate on the City’s debt, and yet would only cover half the face value of our outstanding debt if sold. Hmmmm.

A bit of advice one gives to entrepreneurs might be useful here: watch the burn. If you don’t manage the burn over the medium term, you lose your ability to make choices.

Selling off assets that have the ability to produce long term economic benefits accomplishes nothing per se unless the asset itsef is non-core or serves as a distraction. In the case of dividend-paying Toronto Hydro, the value to be achieved via an asset sale has to exceed the present value of its long term net cash flows for it to be a smart or even necessary option to consider. Something that rarely happens when governments sell assets. Think Purolator Courier or the 407 as but two examples.

Anthony Patch, in F. Scott Fitzgerald’s The Beautiful and Damned, learned this lesson. Eating into your capital base to pay for today’s lifestyle is the well-established road to financial hell.

MRM
(disclosure – this blog, as always, reflects a personal opinion and in no way represents the views of the TPA, its Board/Staff or the federal government)