The recent unhappy news that Canadian taxpayers will soon be at least partially bailing out the government of Newfoundland and Labrador, the owners of Nalcor, which is completing the massively over-budget and behind-schedule Muskrat Falls power plant, may be the least worst option for all concerned. While it was avoidable, the very nature of Crown corporations makes that hard.
The first issue is that of governance. Whatever safeguards and standards are implemented, time and again, Crown corporations are subject to meddling by their political masters. Having supposedly independent directors on their boards is little or no protection. These directors are also, ultimately, political appointees and are rarely truly independent or peers of executives at investor-owned firms.
Muskrat Falls became quasi-iconic and studies were manipulated and cherry-picked to make the dubious venture appear as attractive and riskless as possible. It became part of the premier at the time’s identity, making it hard to revise, let alone cancel it. Warnings were ignored and deliberately so.
The second and most important issue is that Crown corporations are not subject to the full discipline of free markets, for goods and services, labour, capital and managerial and professional talent. Even without disastrous project decisions, the rate of return on invested capital by Crown utilities has been abysmal, compared to total returns to shareholders for publicly traded private sector utilities.
Here are some examples: In a valuation study for the Frontier Centre for Public Policy, Nalcor’s un-taxed return on equity, ‘ROE,’ fell from 10.2 per cent to 9.41 per cent, from 2008-2011, inclusive; return on assets, ‘ROA,’ which includes all money thrown into the black hole, marginally improved, from 3.45 per cent to 4.33 per cent. Afterwards, as project money poured in, free cash flow sank and nearly all financial metrics did as well.
Similarly, Manitoba Hydro, currently finishing off, had, from before its Keeyask and Bipole II or III fiascos: ROE of 9.06 per cent in 2007, 7.56 per cent in 2010; ROA of 1.14 per cent in 2007, 2010: 1.32 per cent.
In contrast, Capital Power sold off by the City of Edmonton on July 9, 2009, had an ROE of 14.0 per cent in 2006, when it was still a municipal quasi-Crown, to 0.8 per cent in 2010, a year past its IPO. Its ROA was also sad: 1.4 per cent in 2006 and 0.2 per cent in 2010. However, public listing was crucial to its subsequent success.
Flung into the competitive private sector, the share price has risen from its $23 issue in 2009 to about $42.50 today; compound annual growth of 5.25 per cent. Its dividend per share was $1.35 in 2010; it is $2.19 currently; growth of 4.1 per cent. Total shareholder return exceeded nine per cent per year, besting the TSX Index average of 5.42 per cent over the past twelve years and was among the top of its utility peers.
It is tempting to imagine what Nalcor, Manitoba Hydro, BC Hydro or even Hydro-Québec may have done with their advantages in public-provided hydro-electric reservoirs and effective monopolies had they been let loose by their empire-building political masters. Taxpayers and ratepayers do not have to suffer. There are at least one hundred and eleven reasons to sell off or shut down state behemoths.
Ian Madsen, Senior Policy Analyst at the Frontier Centre for Public Policy; Author, More Than 111 Reasons to Sell Off Or Shut Down State-Owned Enterprises (to be published later this year).