Sound fiscal management is achieved in part through optimization of the Province’s assets; using them strategically is a cornerstone of good government. That is why Ontario is moving ahead with its plan to unlock the value of its assets to help support Moving Ontario Forward. In the case of asset sales, Ontario is reinvesting the net proceeds through the Trillium Trust in transit, transportation, and other priority infrastructure projects that will create jobs, expand opportunity and improve prosperity for all Ontarians.
The Province has sold its remaining General Motors shares and is in the process of selling the Liquor Control Board of Ontario’s (LCBO) head office lands. The Province is also looking at its other real estate assets, including Ontario Power Generation’s (OPG) head office building, as well as Seaton and Lakeview lands.
As laid out in the 2014 Budget, the government put processes in place to move forward with plans to unlock the economic value of Provincial assets, including establishing the Premier’s Advisory Council on Government Assets.
In the 2014 Ontario Economic Outlook and Fiscal Review, the Province shared the Council’s initial findings, which the government supported. The Council’s mandate was enhanced so that it could undertake further due diligence and consultations with stakeholders, develop an implementation plan for the government and provide final recommendations to inform the 2015 Budget. The Council has now delivered its recommendations to the Province, with respect to beer retailing in Ontario and broadening the ownership of Hydro One. They include the following:
The 2014 Budget introduced the Trillium Trust Act, 2014, which established the Trillium Trust to provide for the dedication of net proceeds from the sale of qualifying assets to support the Province’s key infrastructure priorities such as roads, bridges and public transit.
Working jointly with the U.S. and Canadian federal governments, Ontario was the only subnational government to invest in General Motors (GM) as part of the restructuring of the North American auto sector during the global recession. The financial support provided by the Ontario and federal governments to the auto sector in 2009 was crucial in protecting jobs across the province. In return for assistance to GM and as part of the company’s restructuring, Ontario received shares in the company. With the recovery of the auto sector, holding these shares was no longer in the public interest.
On February 4, 2015, the Province completed the sale of its remaining 36.7 million GM common shares for total proceeds of $1.55 billion, resulting in a fiscal gain of $1.08 billion. The average price at which these shares were sold was $42.34 Cdn. General Motors redeemed the Province’s preferred shares on December 31, 2014, for total proceeds of $0.16 billion, including a gain of $0.02 billion.
The $1.1 billion gain on the sale of the common and preferred shares exceeds the $900 million asset optimization target included in the 2014 Budget for 2014–15 Net Revenue Gains from Asset Optimization.
The Ontario government directed the gain from the sale, including the additional $200 million generated above the 2014 target, to the Trillium Trust to invest in Moving Ontario Forward. The Province has also directed to the Trillium Trust the $249 million net proceeds from the September 2013 sale of the Province’s interest in 10 million shares of GM.
As a result, the Trillium Trust now has $1.35 billion available for investment in roads, bridges and public transit throughout Ontario.
Since April 2014, the Premier’s Advisory Council on Government Assets has been examining ways to unlock the value of key Provincial assets, generate a better return, and generate lasting benefits for the people of Ontario. This will help expand the economy, boost productivity, improve competitiveness and create jobs for Ontarians.
The Council’s work has been guided by three key principles:
On November 13, 2014, the Council delivered a report on its initial findings on ways to maximize the value of LCBO, Hydro One and OPG to the Province. Since then, the Council has been working on the second phase of its review.
On April 16, 2015, the Council released two reports entitled Striking the Right Balance. The reports outlined the findings from the second phase of the Council’s review and addressed beer retailing and distribution, broadening ownership of Hydro One and supporting consolidation in the electricity distribution sector.
The government is currently acting on the Council’s recommendations as outlined below, as this will help provide funds to invest in infrastructure that could deliver high societal and economic returns to Ontario.
The Council has conducted further due diligence on Hydro One’s businesses and consulted with a range of stakeholders on its initial findings.
What is an initial public offering (IPO)?
An IPO is the first offering of shares of a company to the public to be traded on a securities exchange, such as the Toronto Stock Exchange. An IPO allows a company to tap into a wide pool of potential investors.
The Council has now finalized its analysis on maximizing value for Ontarians and providing enhanced protection to ratepayers, and is recommending that the Province move forward with an IPO of approximately 15 per cent of the common shares in Hydro One, with additional shares being made available in subsequent years, over time totalling up to 60 per cent of the Province’s common shares in Hydro One. By law, the Province would retain 40 per cent of its initial common shares in Hydro One, following the IPO and subsequent share offerings.
The rest of the voting shares in Hydro One would be broadly held, with no other shareholder allowed to have more than a 10 per cent holding. As such, immediately following the IPO and subsequent offerings, the Province expects to be the largest shareholder in Hydro One. The Province intends to introduce legislation that would, if passed and proclaimed, enshrine the share ownership restrictions.
In addition, the Council recommends using Hydro One Brampton as a catalyst for LDC consolidation in the Greater Toronto and Hamilton Area (GTHA), in the immediate term, through a merger between Hydro One Brampton and three other urban LDCs, and thereby strengthening competition in the electricity distribution sector. It is the Council’s view that such a merger would protect the interests of electricity ratepayers by facilitating consolidation.
Through its work, the Council has identified a number of significant benefits associated with keeping Hydro One’s transmission and distribution businesses together:
The Council has identified that these uniquely attractive conditions enable the government to maximize value and obtain greater net proceeds. Under legislative amendments proposed as part of this Budget, these would be available to be credited to the Trillium Trust and directed into building transit, transportation, and other priority infrastructure, through Moving Ontario Forward, as described in Chapter I, Section B: Building Modern Infrastructure and Transportation Networks.
Most importantly, the Council recognized that a consolidated Hydro One would continue to have its rates regulated by the independent Ontario Energy Board (OEB), ensuring that Hydro One customers and ratepayers are protected and adequately served.
As part of an effort to strengthen long-term performance and unlock the benefit for all Ontarians, the government accepts the Council’s recommendation and intends to broaden ownership in Hydro One. Accordingly, the Province is planning to launch an IPO for approximately 15 per cent of Hydro One common shares in fiscal 2015–16.
Electricity ratepayers are an important priority for the government. As is currently the case, the ability to set rates would continue to be beyond the authority of Hydro One and its board and management. Rate-setting would continue to be the responsibility of the independent OEB under the authority of the Ontario Energy Board Act, 1998.
Rate regulation is a sound and transparent framework that ensures ratepayers’ interests remain protected and that necessary investments are made to provide reliable and affordable services. The OEB already regulates both public- and private-sector-owned companies, such as natural gas utilities and electricity transmitters and distributors. Rate regulation of widely held companies is commonly used in other jurisdictions across the world. The government proposes to introduce legislation that would strengthen the OEB to further enhance its ability to protect electricity ratepayers with respect to cost, consumer protection and service reliability.
The Province intends to retain 40 per cent of its Hydro One common shares and, as a responsible shareholder, to take steps through its ownership and the structure of the IPO to ensure that strong governance continues to be a core value of Hydro One. The rest of Hydro One shares would be broadly held, with no other shareholder allowed to hold more than 10 per cent of the equity.
The government is introducing proposed legislation that would require that Hydro One retain the company’s headquarters and grid control centre in Ontario. In addition, the proposed legislation provides for substantially all of Hydro One’s senior executives with strategic decision-making authority to be located, and carry out those functions, in the province.
To support Hydro One’s transition to being broadly held, the government agrees with the Council’s recommendations that the company should operate, to the extent possible, in the same legislative and regulatory environment as other publicly traded, rate-regulated entities. To achieve this, the Province would put in place revised articles of incorporation and a new governance agreement, and is also proposing several legislative amendments.
“The Council believes that this approach strikes the best possible balance. It offers the people of Ontario maximum financial return, providing funds for investment in strategic transit and transportation infrastructure all across Ontario. It preserves the Province as the largest stakeholder, ensuring the long-term preservation of the public interest. It provides for a strong new governance structure, and it allows the government to share in the future of this large, growth-oriented company thereby retaining a growing income stream for the lasting benefit of the people of Ontario. By unfettering Hydro One and allowing it to expand its business opportunities, the company could also return an increasingly profitable dividend to all Ontarians.”
Premier’s Advisory Council on Government Assets, “Striking the Right Balance: Improving Performance and Unlocking Value in the Electricity Sector in Ontario,” (April 16, 2015).
These reforms will help support a large, Ontario-based and broadly held company that can succeed and grow with this proposed new ownership and governance structure. Ratepayers would continue to be protected through the OEB and governance and accountability controls put in place by the Province, in addition to the disclosure and governance requirements that apply to all publicly traded companies. The benefits generated from introducing new capital and allowing Hydro One to be more innovative and efficient in its operations would benefit ratepayers, the Province and Hydro One’s new broad base of shareholders. This would further solidify the company as it continues to provide high-quality transmission and distribution services in the province to support Ontario’s people and businesses.
Incorporating new capital in Hydro One would also empower the company to continue pursuing opportunities to support consolidation in the electricity distribution sector on a voluntary commercial basis. Moving forward with the proposed merger of Hydro One Brampton and three other urban LDCs would create one of the largest LDCs in the province by number of customers, and provide an additional catalyst for further consolidation in the provincial electricity distribution system.
Through these consolidation initiatives, Ontarians would benefit from a modern and more efficient electricity sector. To further incent efficiencies through consolidation and to benefit ratepayers, the Province is also taking steps to lower the transfer tax on municipally owned electricity utilities and address other potential tax implications of consolidation, on a time-limited basis, as discussed in Chapter IV: A Fair and Sustainable Tax System.
Most importantly, the government, through the Trillium Trust, will invest the net proceeds from the broadening of ownership in Hydro One into building public transit, roads and transportation infrastructure. These investments are part of the Province’s plan to produce long-term economic benefits for Ontarians by stimulating and supporting economic growth and creating jobs.
Unlocking the value of Provincial assets and redeploying that value to better serve the public is a responsible way of managing assets for the public good. In its initial report released in November 2014, the Council described Ontario’s beverage alcohol retail system as consisting of three quasi-monopolies: the privately owned Brewers Retail Inc., operating as the Beer Store, the Liquor Control Board of Ontario (LCBO) and off-site Winery Retail Stores. The Council believed the Province had an opportunity to retain the system’s efficiencies, enhance the customer experience, increase access in a managed and socially responsible way, and give taxpayers a fairer share of the benefits of the system, while keeping prices below the Canadian average.
The government agreed with the Council’s initial findings and asked it to move to the second phase of its review. In this phase, the Council engaged more directly with the LCBO and key stakeholders to refine its findings. After considering the Council’s work and recommendations, the Province is developing a path forward for beverage alcohol retailing in Ontario to maximize returns to Ontario and create a fairer, more consumer-friendly retail system.
The Province will authorize the sale of beer in grocery stores to improve consumer service, in a manner that meets the government’s social responsibility mandate for the sale of alcohol beverages in Ontario. Introducing competition into this retail market should incent innovation, while improving customer convenience.
The government will move as quickly as possible to open up grocery store sales of beer in urban population centres across Ontario. The Province will work to have sales available in up to 150 stores by May 1, 2017. Depending on consumer demand, up to 450 such stores could be put in place over the next 10 years.
The government continues to be committed to social responsibility as it relates to beverage alcohol distribution. The LCBO and/or Alcohol and Gaming Commission of Ontario (AGCO) will oversee the sale of beer at grocers and the government will mandate in law that the sale of alcohol be restricted to set hours, that alcohol be placed in a designated section of each store, and that grocers implement the necessary staff training for the sale of alcohol to the public.
Ontario benefits from a thriving craft beer industry that is creating jobs and providing increased choice to consumers. The government remains committed to supporting Ontario’s craft beer industry by reducing red tape and expanding retail opportunities. To meet this commitment, the Province is changing beer retailing in Ontario by:
The Council has successfully negotiated a framework of key principles with the Beer Store and its owners. The government has accepted the key principles and is now negotiating a New Beer Framework, a binding agreement based on these principles, with the Beer Store and its owners. The New Beer Framework will improve the fairness, transparency and consumer appeal of the Beer Store, while maintaining its operation as a low-cost, efficient distributor of beer in Ontario. Some of the key principles to be included in the New Beer Framework are:
The New Beer Framework will be in effect for an initial period of 10 years, subject to a renewal for five years. This will provide for some degree of long-term stability for planning purposes, without locking in the proposed model. The government is introducing legislation to permit implementation of the Council’s findings.
The Province will introduce legislation to increase its annual revenues from all beer sold in Ontario by approximately $100 million, phased in over four years, by implementing a new three cents per litre beer charge in November 2015. The new charge will increase by three cents per litre every year until 2018, or approximately 25 cents per 24-pack annually, on average.
Over the coming months, the Council will engage with wine and spirits stakeholders on reforms to their sectors. The LCBO will proceed with consumer enhancement initiatives, which are built into their 2015–16 Business Plan. As this work progresses, the Council will continue to work with the LCBO on enhancing their pricing and mark-up strategies to better leverage their buying power in a transparent and rule-based manner.
Selling alcohol responsibly is a public trust that the government takes very seriously. As part of the Province’s efforts to ensure alcohol is sold in a socially responsible manner, the government will establish and enforce social responsibility standards for any new retailers of beverage alcohol. Additionally, the Province will move to rationalize the AGCO’s and LCBO’s oversight of beverage alcohol retailing in Ontario to, among other things, ensure all current and future activities are aligned to support the Province’s social responsibility goals and priorities. The Ministry of Finance will work with the Ministry of Health and
Long-Term Care to continue to develop initiatives to support safe consumption of alcohol, in light of the expansion of alcohol sales in Ontario.
The government continues to move forward with the process to sell the LCBO’s head office lands. A Request for Proposal (RFP) was issued on September 4, 2014, and the transaction is expected to close in 2015–16. This sale will ensure that Ontarians get greater value from this public asset.
The Province has also been performing due diligence on options for OPG’s head office building and continues to move forward on the sale process.
Other real estate assets continue to be reviewed under a longer-term revitalization plan, including the former Lakeview generating station property in southeastern Mississauga and the Seaton lands in Pickering. The government is currently moving forward, by examining and evaluating options to maximize value for these real estate assets.
The flow chart describes how the government’s commitment to unlocking the value of Provincial assets is supporting Moving Ontario Forward. The government is unlocking the value of its assets through the pursuit of a number of key opportunities, including asset sales and other asset optimization initiatives.
The gains from asset sales and incremental revenue from other asset optimization initiatives will help support the Province’s key infrastructure priorities such as bridges, transit and roads. In the case of asset sales, Ontario is reinvesting the net proceeds through the Trillium Trust. These investments in infrastructure are being made under the Province’s plan to grow the economy, create jobs and enhance quality of life for Ontarians.