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.
http://www.thestar.com/opinion/article/790643--selling-off-our-public-assets-makes-no-sense-for-toronto
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