ONTARIO’S MONOPOLY GAME
Remember who shops at the LCBO. Corcoran,
Long before Ed Clark became CEO of TD Bank he was know as “Red Ed,” especially in Calgary, where Mr. Clark — then a deputy minister of energy in Ottawa — helped orchestrate the Trudeau government’s infamous policy fiasco, the 1980 National Energy Program. Maybe Mr. Clark was never red, but in his latest role as head of the Ontario government’s Advisory Council on Government Assets, the former head of one of Canada’s leading capitalist enterprises looks decidedly pink.
The Council is charged with coming up with ways to squeeze more cash out of Ontario’s three giant state monopolies: liquor, electricity generation and electricity distribution. In a speech last week, Mr. Clark delivered an update on the council’s soon-to-be-published outline of how the government should proceed. Unfortunately, it fails to state the fundamental flaw in the whole project.
The government’s objective is to “maximize the value” of the three enterprises “for the people of Ontario.” This value, supposedly in the billions, is to be transferred to the province which will then invest in other government monopolies, namely transportation and transit infrastructure.
It’s a futile exercise. Since the people of Ontario pay for the services provided by the liquor and power monopolies, ultimately the only way to get more cash out of the monopolies is to somehow make “the people” pay more for liquor and electricity, via taxes and other schemes. As somebody once said, there’s no free lunch.
Mr. Clark must surely know this, but he and his council colleagues are saddled with a mandate from Liberal Premier Kathleen Wynne that forces the council to chase its tail around in search of stray billion-dollar payouts. Instead of plans for privatizations and deregulation, competition and market orientation to improve the lot of consumers and the economy, the council will instead propose its only viable option, which is to increase the market power of the monopolies.
To take one example, here’s part of the council’s strategy to get value out of the Liquor Control Board of Ontario (LCBO). At first, Mr. Clark talked about allowing the LCBO to be “somewhat unshackled” and to make it “act less like it is a public monopoly.” But then, a few sentences later, he called on the LCBO to use “its buying power” to drive down the wholesale cost of its wine and liquor products. The
Ontario’s plan to extract billions from its monopolies can only mean
more power to the monopolies
LCBO monopoly, he said, could push for volume discounts from its suppliers. The money it saved, somehow miraculously extracted out of industry margins without any impact on final prices or anything else, would not go to customers. Instead, the savings would be “captured” and passed on to the government.
Mr. Clark had a similar plan for another related monopoly, beer. Ontario beer sales are currently shared by a retail duopoly, the LCBO and Ontario Beer Stores, s which are owned by the major beer companies. To extract maximum value from beer, Mr. Clark’s council proposes first that the LCBO raise its service charge on the handling of beer by an unspecified percentage. The plan, he said, is to “introduce a staged program to allow the LCBO, and therefore the government, to capture more of these profits.” The Beer Stories would also have to pay new charges. “Ontario taxpayers deserve their fair cut of the profits generated from beer producers.”
The plan, therefore, is to impose a beer tax to be paid to the government. Won’t the new fees — essentially a new tax — be passed on in higher prices to consumers? “We will address that issue as well,” said Mr. Clark, implying some kind of price controls, perhaps.
Mr. Clark betrayed the paralyzing paradox of the council’s mandate: “We need to find a balanced approach … You cannot argue, on the one hand, that the government should have a bigger share of the benefits of our current [monopoly] system and then, on the other hand, significantly destroy the monopoly.”
Good point. Which is why the LCBO and its management are likely to be in agreement. Monopoly is good, essentially, and all we need is some new exercise of monopoly power to allow the government to squeeze more out of consumers and suppliers.
The council’s plan for the electricity industry more or less follows the same basic premise on the belief that if the government can move the chess pieces, a couple of billion dollars can be found lying around that the government can scoop up. Elsewhere on this page, power industry watcher Parker Gallant says the council plan misses out on billions in value because of its failure to privatize and its flawed plan to take over and then somehow re-sell local distribution companies.
Whether Mr. Parker is right or not remains to be seen, but all in all the Ontario plan for these three major monopolies is perverse and will take decades to unfold. The government will maintain these bloated, high-cost monopolies so that it can milk them for more cash for transit infrastructure.
There is one bright spot in Mr. Clark’s plan. He says the government must go after union wages and benefits. “In today’s environment, the package of wages, benefits, pensions and practices, in some cases, exceed not only private sector standards, but public sector standards too. Not in all cases, so one must be careful not to use sweeping generalizations, but there are clearly some issues here. Pensions stand out at both OPG and Hydro One.”
For some reason, beer received more headline attention that the power industry’s pensions and benefits. That could change.