Remarks delivered by Ed Clark, Chair of the Advisory Council on Government Assets, at the Metro Toronto Convention Centre, October 17, 2014
Retain and Gain: Making Ontario assets work better for ratepayers, taxpayers and consumers
CHECK AGAINST DELIVERY
Thank you for joining me here today.
As you heard in the introduction, I have the honour to Chair the Advisory Council on Government Assets. The Council's mandate is to review three public assets - the LCBO, Hydro One and OPG - with the aim of maximizing their value to the people of Ontario.
In doing so, we took into account the government's preference to retain core assets and to ensure that we found ways to improve customer service and maintain an engaged employee workforce.
I have been enormously assisted in my work by a great group of colleagues: David Denison, Janet Ecker, Ellis Jacob and Frances Lankin. All clearly come with diverse backgrounds, experiences and perspectives. What we have in common is a concern for Ontario's future, and in particular, its need to improve its infrastructure in a fiscally responsible way; a desire to help the Province actually make smart, needed changes; and a bias to take a pragmatic approach.
We have had the opportunity of meeting with the management teams and Boards of the three companies as well as the leadership of their labour unions. These meetings were very helpful as were our meetings with over 20 stakeholder groups.
The Council members put aside individual biases and views and asked some basic questions:
Could these public companies be better run? And be more customer-focused?
Are all the assets embedded in these companies core to their mission statements?
And because these public companies - and the government more broadly, like any company in the private sector - have limited capacity to act - is there a set of doable steps within their capacity that would unlock value?
Our bias was clearly towards the doable. It is easy to imagine dramatic shifts in strategy - but such shifts would require deep cultural changes in the organizations, and broad societal support to make them happen. We prefer a more measured approach - each step of which improves what we have and actually gets things done rather than adds to the list of reports never implemented.
The Council was also guided by the government's desire to find the financial capacity to fund needed transit and transportation infrastructure in the Province.
But we kept several things in mind.
First - as mentioned, government's preference is to retain ownership of core assets. The Council also believes you should not rush to sell assets - rushed sales are not in the public interest. Any sale must be a carefully staged and competitive process.
Second - we asked whether the government is, indeed, the best owner of these assets, and the purpose served by government ownership. Would a company - in private hands - be better able to serve the consumer or ratepayer? Would bringing in the private sector unlock a company which could grow and create jobs?
Third - these assets all earn income for the Ontario government - income which is important given its deficit position. But the proceeds of any divestiture aren't likely to be reinvested into new income-generating assets. The new infrastructure assets may add enormous value to the Province, and in turn, create income for the Province in the medium-term. But in the short-term, there is likely to be an income loss. The Council was very mindful of that impact. So, in order to offset any loss of income, it became all the more critical to improve the performance of the assets retained by the government.
And finally, the Council members agreed that swapping ownership in infrastructure assets can make sense. But it is important that the funds raised are used to invest in assets that deliver high societal or economic returns to the Province. The government has made clear that funds raised in this process will be used to invest in transit and transportation infrastructure. Improved infrastructure will allow the economy to grow faster, create more jobs, and increase both competitiveness and productivity. In addition, of course, there are jobs directly created by undertaking the investments.
I am pleased to say we, the Council members, have agreed on the approach. And we are unanimous in our conclusions.
We also have the general buy-in from the management teams of each company, and have benefited from the perspectives of unions and stakeholder groups.
And our conclusions have been reviewed and validated by independent consultants.
This marks the completion of phase one. We have a sound, actionable framework.
The government has indicated that it is comfortable with the direction in which we are headed. They have given us the go-ahead to move into the next phase where we work out in detail how to do what we propose.
By putting out a broad framework of our direction, we are now in a position to have more detailed discussions with the various stakeholders about implementation and execution. The devil is often in the details.
Obviously, as we work through the details of our proposals, and get further feedback, we will refine our ideas.
Our intent is to provide an interim report with the background on our thinking around the government's Fall Economic Statement - and a final report in the Spring to inform the government's Budget process. The government would then be in a position to respond to the final report and introduce any required legislative changes stemming from our proposals.
I want to use my time today to help kick start this next phase.
Let me first cut to the chase.
We recommend keeping all three companies - OPG, Hydro One and the LCBO.
We believe you can retain the value of our current beverage alcohol system which provides low- cost controlled access, while at the same time improving the customer focus of these companies; increasing access in a limited way; and giving the taxpayers a fairer share of the benefits of this system.
We believe that OPG needs to focus on its major project - the Darlington refurbishment - and on improving its operations and lowering its costs. We also believe that Hydro One should concentrate on lowering its costs. Over time these improvements will reduce pressure on electricity rates from what they would have been.
In the case of Hydro One, there is an opportunity to address a long-term problem in the electrical distribution system - the excess number of small players. We believe the government should use this opportunity to help solve this problem.
If we put our recommendations together, we could free up $2-$3 billion which can be invested in transit and transportation infrastructure without increasing the overall debt or deficit. A fiscally prudent step to solving our infrastructure issues.
As I said, we would keep the core of Hydro One - its transmission business - but we would reduce the government's ownership in two assets forming part of Hydro One - Hydro One Brampton and the distribution business within Hydro One Networks. We suggest doing so in a manner which can spur needed consolidation in the electricity distribution industry. Such consolidation could reduce pressure on rising electricity rates from what they would have been, as well as improve the adaptability of the electricity distribution system.
Over time, such an initiative would realize funds which the Province could invest in transit and transportation infrastructure. In effect, we would enable current infrastructure in the electricity system to be improved, and new, needed infrastructure which is difficult to finance in the current environment, to be built.
We have also found significant ways to improve the operations of the companies. These improvements will benefit ratepayers in the case of the electrical companies. This is a good thing. Others will benefit consumers of beverage alcohol through enhanced accessibility and an improved customer experience. Again a good thing.
Finally the changes will substantially improve the returns that Ontarians receive from these businesses. Also a good thing.
However, these enterprises will require - if they are to make the needed changes - the strong support of the government and a willingness to resist pressure by interest groups who have benefited from the status quo.
In looking at these companies, it is easy to be critical of their performance. But it is important to reflect on why they perform as they do - because they are publicly-held entities where the political system often intervenes in response to strong interest groups. The general good is often sacrificed for the particular good.
So we asked these companies what they would do if they were unconstrained. Not free from serving the public interest. That is their job. But free from political pressure. Perhaps a bit naive - but a good starting point if you are trying to improve something.
These companies, working with us and our consultants, came up with many good ideas. Some can be done right now. Some will require political courage to stand up to large companies, which have done very well in the existing system.
And some will require unions and employees at all levels to recognize that aspects of the current labour agreements, in certain cases, are not sustainable. They were agreed to at the bargaining table. They should be changed at the bargaining table. But, left in place, they trap these companies to be underperforming and force people to conclude that privatization is the only route to solve these issues. We believe there is a better way.
And so what do some of these changes look like?
Let me start with the liquor distribution system in Ontario - which centres around three quasi-monopolies - the LCBO, which is publicly owned; the Beer Store and the off-site Winery Retail stores - which are both privately owned.
I'll say right upfront - the current system does a pretty good job in keeping prices low for Ontarians - indeed, our research would suggest we pay less for alcohol than the national average.
The public is also well-served - there aren't many communities where you can't buy beer, wine or spirits in Ontario.
So should we abolish these monopolies? That is certainly an option. It would, however, be a radical change. You could recapture all the government income through taxation. The experience elsewhere would lead you to believe this move would raise the cost of liquor by replacing our current low cost distribution system with a higher cost distribution system. It would also dramatically increase the number of access points, and probably lead to different prices in different distribution systems and different locations.
There is a certain attractiveness to this proposal. It takes the government out of the alcohol distribution system - and if extended to the Beer Store and the off-site wine stores - would end private monopolies.
Such a bold overhaul of the system would require a broad consensus that it is the right thing to do. There are many issues it raises - such a consensus does not appear to exist today. It is, as well, not an idea the government supports. They believe there are more pressing issues in Ontario that they wish to address. The Council agrees.
But what about just selling the LCBO?
It is an attractive asset - and could command a pretty penny for the public coffer. We know there would be interested parties.
However, we struggled with the concept of handing this monopoly over to a private owner.
The LCBO is not a natural monopoly, as is the case for electricity or gas distribution. We have a long history of regulating those businesses. The liquor monopoly was created by the government, for alcohol control reasons, in 1927.
Would we then create a price regulator for the new privatized LCBO?
Moreover we couldn't see how the consumer would be better off - and it is possible that the consumer could be worse off unless you developed a strong regulatory system. Would the buyers also insist on limiting the growth of non-LCBO distribution channels?
The core argument made by proponents is that government entities cannot be improved because the different interest groups will always persuade politicians, of all political persuasions, to back down when changes hurt their interests.
In our view, the better alternative would be to see what would happen if the constraints of operating a public entity could be somewhat unshackled. The LCBO then would have the capability and capacity to improve profitability - enhance their service - and do it in a way that is socially responsible. In effect can we make this public monopoly act less like it is a public monopoly?
If it turns out we cannot do so, then our bias would be to look again at ways to introduce even more competition than we are suggesting today. Competition is a good thing.
Significant productivity enhancements and changes which improve the customer experience have been identified by the Council. Some of these improvements can be done without changes in labour relations. Management has endorsed them.
Others will require the full engagement of the employees to make the customer-focused changes we envision.
What are the changes which could be made?
Currently the LCBO really runs a cost plus business.
The LCBO doesn't set the price to its suppliers or customers. For different price ranges, it simply asks a supplier how much their product costs. Then it marks up the price, using a fixed percentage, and puts it on the store shelf.
So, in a sense, what you really have here is a tax man dressed in retailer's clothing.
We were troubled that the LCBO doesn't use its buying power to lower costs - despite being one of the largest buyers of wine and liquor in the world. These lower costs could result in higher margins or be passed on to the consumer. Why not do a bit of both?
Indeed, the LCBO is incented not to negotiate volume discounts because it actually collects more money if the supplier charges more for the bottle of wine.
We believe - and the LCBO management agrees - that it should move in a staged way to introduce a new pricing strategy - where in certain circumstances - the LCBO will negotiate the price at which it buys, and set the price at which it will sell - in effect, a negotiated margin.
So why hasn't the LCBO adopted this approach before? In simple terms - politics. Once you set the price for the consumer and the net price to suppliers, you become subject to enormous political pressure - suppliers who want a better price, consumers who now hold you accountable if prices go up - and politicians who often cave to such pressures.
The government has to have the LCBO's back. That's the only way we can expect it to act like any other large retailer and control the price of what it buys and sells.
We would propose to introduce negotiated margins gradually, focusing on the LCBO's largest liquor and wine suppliers first - I will address beer later.
So what would this new pricing model mean for consumers?
Nothing in the short run. The initial focus of the LCBO will be to increase margins from suppliers, and realize operational savings. By taking control of prices, the LCBO can improve margins from suppliers without charging consumers more. If it finds opportunity to raise prices to expand margins in the future, it should also introduce value products as any other retailer would.
Right now, Ontarians buy their alcohol at prices below the national average. We say keep it that way. This should be a governor for any future price increases by the LCBO. Consumers must continue to benefit from our lower cost system.
In addition, the LCBO does, and should continue to, review its minimum prices for wine to ensure they are consistent with its social responsibility mandate. Under the new pricing regime the LCBO will capture more of these price increases.
The "retailization" of the LCBO would also mean adopting other strategies.
It won't surprise you to hear this from me, but the LCBO should build their business around what the consumer wants, instead of what it wants.
To that end, it is critical to improve customer choice and convenience.
For instance, customers can only buy 6-packs of beer at the LCBO. It's inconvenient. Moreover there is a price break for buying a dozen or a case of beer. A price break you can only get at the Beer Store. Why not offer some form of that to consumers who buy from the LCBO?
So we are saying: let the LCBO sell 12-packs too, make it more convenient to buy beer, and pass on the savings to the consumer. Why not cases of 24? Let me address that when I talk about the Beer Store.
We would phase-in the roll-out of 12-packs so that we are able to monitor the impact on the Beer Store and make any necessary adjustments.
Adding 12-packs will have the added benefit of helping our craft breweries. The LCBO is a core distribution channel for them. Some of these entrepreneurial firms offer 8 or 10 packs, which currently aren't available through the LCBO.
In addition, we believe that the LCBO should set itself the goal of being the best retailer of liquor in the world. This doesn't mean in any way abandoning its social responsibility mandate. We are fully supportive of that mandate. We are not proposing changes to "push" more drinking. We want changes to make purchasing alcohol more modern. The LCBO needs to adjust to the changes that are occurring everywhere in retailing as a result of the digital revolution. It needs to respond to a desire by the public to taste new, more boutique brands.
The LCBO has come up with a number of moves they can make.
The LCBO wants to set their goal to be the best-in-class on-line retailer, fully integrating their website with their business. They want to create a set of warehouse stores in major cities to carry cases of attractively-priced products not available in standard LCBO stores. You could get their products at the warehouse, or you could order them on-line and pick them up at your local LCBO.
They are also looking to use their website to make a broader selection of products available for retail consumers than is available now, connecting shoppers to the LCBO's warehouse directly and creating an on-line marketplace where producers from around the world can list their products. Once purchased, these would be shipped for pick-up at local LCBO stores.
The LCBO is also open to creating specialty shops in some of their larger stores. One store could feature craft beers from around the world, while another could feature specialty liquor - perhaps a Scotch boutique. They will also orient certain stores to reflect the neighbourhood in which they are located - delivering products unique to that store such as Greek or Portuguese wine and becoming destinations for consumers.
Many consumers love perusing the selection of products at the LCBO. Others simply want to pick up a bottle of wine at a specific price point. The LCBO would help the latter group by labelling certain products as "buyers picks" and placing them in prominent positions. Suppliers would bid on these opportunities.
We already have private specialty wine stores - I will get into this topic a little later - but they carry only the products of the winery that owns them. The LCBO already gives lots of shelf space to domestic wines. So the real issue is whether we need more access points. Probably not. But would the system be better if we had some private sector competitors innovating in the retail space? Perhaps, but we are cautious about how far to go.
We have reviewed the experience of other jurisdictions. There they opened up too many outlets, and found that the new entrants pressed the government for more concessions to make them viable, in effect reducing government revenues. We need the right balance.
We are open to exploring these ideas in our next phase - how to press for more innovation without destroying the benefits of our current structure. In the meantime, we have a specific concept on wine stores which I will discuss later.
One barrier to getting buy-in on making these changes is that the LCBO appears to be very "profitable" as a business. This profit statement makes it challenging to motivate the company to find improvements, as even material savings opportunities appear marginal when added to a $1.7 billion dividend. But it's important to point out that most of this profit is actually the equivalent of taxes. We will ask management to make this point more clearly in how they present their results. In essence, we can't think about the LCBO as a retailer without first separating the retailer from the tax man.
Let's turn to the Beer Store.
It was initially a cooperative for Ontario brewers. Over time, these breweries were bought up by the three beer firms - Molson, Labatt and Sleeman, which, in turn, were bought by MolsonCoors, AB InBev and Sapporo, large beer giants who now have control over the Beer Store monopoly.
Beer is sold both in the LCBO and the Beer Store. The current LCBO service charges - fees levied on beer producers to cover the LCBO's distribution costs - have not been changed since 1989. Arguably, as a result, the Province earns less on a bottle of beer sold in the LCBO than one sold in the Beer Store. We recommend raising the LCBO service charge.
All producers derive advantages from the existence of this low-cost monopoly.
In many ways, the situation is similar to sales of liquor and wine made by the LCBO. The benefits of the low cost and tightly controlled distribution system partly go to the producers. As we introduce a staged program to allow the LCBO, and therefore the government, to capture more of these profits, we should also make a similar adjustment to the Beer Store.
Ontario taxpayers deserve their fair cut of the profits generated from the beer producers.
So what's a fair share and how should we realize it?
That will be a decision made ultimately by the government, following our advice and following discussions we will have with all the interested parties.
So how can we be sure that brewers won't just pass on the additional cost immediately to the consumer?
We will address that issue as well.
We need to modernize the agreement which governs the relationship between the LCBO and the Beer Store, to provide greater transparency and to ensure that costs are allocated fairly between suppliers.
There are other things we should do to improve the consumer experience in buying beer.
We have already said we favour allowing the LCBO to sell 12-packs.
We want to make sure all breweries get equal treatment at the Beer Store.
Finding a craft beer at many Beer Stores can be like the game of Where's Waldo?: hard to spot.
The craft breweries are an important part of the industry. If the Beer Store's monopoly is to be continued, it should be required to treat all producers equally.
We need to find a balanced approach with these changes. You cannot argue, on the one hand, that the government should have a bigger share of the benefits of our current system and then, on the other hand, significantly destroy that monopoly. The Beer Store is the province's low cost outlet for beer. We don't want to undermine its economics by allowing the LCBO to sell cases of 24 - the bulk of Beer Store sales.
But the moves proposed would keep the economics of our "monopoly system" largely intact as well as provide more points of access, more innovation, and introduce some healthy competition to the existing system.
Let's turn to the third and final monopoly in the system - the off-site winery stores - which you come across in your local grocery store or as a stand-alone store in your neighbourhood. The wine stores do offer Ontarians convenience.
This private monopoly is comprised of six wine producers of which two, Constellation and Peller, are the largest with 92% of the stores. This system was built by the six companies over time as they chose to invest in distribution to enhance sales of their products.
They have been grandfathered within international trade agreements. Under these agreements and current legislation, no new wine stores can be added unless they carry all wines: Canadian and international.
Obviously for other Canadian producers it is frustrating to see your competition with exclusive access to a distributor that you cannot use.
Moreover there is a tax fairness issue. The stores are treated as if they are at the winery site, and have a low tax rate and can avoid the LCBO mark-up. In effect, a bottle of wine sold through one of the wine stores yields less to the government than a bottle of wine sold through the LCBO.
This anomaly seems even starker in the case of blended wines, which are sold as Canadian but are in reality foreign wines topped up with Canadian wines, often around only 25% of total content.
On the other hand, our bias is to create more competition rather than less. So wine stores - in some format - are a positive feature of the system. We also recognize that the producers of blended wines are important buyers of Ontario grapes. And it is important to recognize that the economics of a store system which offers only wines, indeed only wines of a single producer, works differently than one like the LCBO which carries a broad range of alcohol products. This system may not be able to carry the same tax/mark-up regime as the LCBO. We will engage the participants in a constructive dialogue to achieve our goals - a taxation system which is fair, an environment that allows domestic producers to have some outlets, consistent with international trade agreements, and a set of changes that continue to see strong demand for Canadian grapes.
One possibility, which would make the system fairer to the other Canadian wineries, is to build upon the existing wine store model where stores are in grocery stores, but in this case have a store license which would offer Canadian and international wines. We would like to explore a model where the licenses would only be available to small wineries, Canadian or international. This is one clear way we could add competition and remove a fairness issue. We will explore the economics of doing so, and the issue of how many licenses should be available.
In short, we believe the alcohol distribution system largely works.
Yes it does have some limitations - but they are fixable within the existing system. We can change the behavior of the three monopolies - add some competition in selective ways - and make sure the public gets its fair share of profits.
Let me now turn to Ontario's energy assets.
Let's start with Hydro One - the Province's electricity transmission and distribution company. Our major efforts were to understand the different parts of the business, how they connected, and the strategic rationale for each.
In our view, there are two major businesses in Hydro One: a transmission business - which we see as the heart of the entity; and a large distribution business spread across the Province. The distribution business is currently comprised of the distribution segment in Hydro One Networks, and a smaller urban local distribution company, Hydro One Brampton.
Our view is that the transmission business is a well-run entity with some opportunities to deliver savings on the operating side and on capital expenditures. The management team agrees in principle with our suggestions and has committed to exploring them further. Any savings here will, in time, be passed onto the ratepayer.
While selling the transmission business would certainly be an attractive asset to the market, it is also an asset which can stay in the public hands and play a positive policy role in on-going energy sharing discussions with Quebec and economic development discussions in the Ring of Fire region.
And so, as mentioned, Hydro One transmission should stay in public hands.
However, there are huge challenges related to Ontario's local electricity distribution system. We are locked into a system with too many entities, some of them highly inefficient, that cannot adapt to the changing environment and lack capital to modernize or consolidate.
Talk to any expert who has studied our system and they will say: The current distribution system is in urgent need of renewal.
The landscape is unnecessarily cluttered and fragmented. There is a hodge-podge of more than 70 local distributors in this province - almost all of whom are owned by local municipalities. About 30 serve less than 13,000 customers.
The Ontario Distribution Sector Review Panel aptly described the problem in its report in 2012.
The municipalities would, in some cases, like to reduce their exposure to this sector.
Way more capital is needed - but equally important - way more entrepreneurial drive.
And significant efficiencies and savings are available that could benefit ratepayers.
We do not believe the Ontario government should divert resources from its key priorities to fund consolidation. Private sector capital is available to do the job.
Put succinctly, we would make the same recommendations as we are doing today whether or not the province needed the money to fund new infrastructure. Our recommendation is just good energy policy. The Province should take action now to act as a catalyst and achieve savings over the longer-term.
Two entities that are key to unlocking this jam are Hydro One Brampton and the distribution business in Hydro One Networks. We would propose using them both to spur industry consolidation. Not force consolidation.
Consolidation will facilitate efficiencies, reducing costs which will reduce electricity rates from what they would have been. It will also improve adaptability of the system and create companies which can grow and create jobs.
In conjunction with using the distribution companies to encourage consolidation, we will review the current barriers and incentives that have been identified which impede consolidation, and suggest possible changes to them. We will undertake that in our next phase.
We are open to looking at different ideas as to how to encourage consolidation. One way would be to use Hydro One Brampton as a catalyst by merging it with one or more GTA-area distribution companies and then bringing in private capital to give it the financial capacity to undertake further consolidation. Ontario could sell down some of its interest in the new company in a secondary offering along with the other existing owners, if they choose.
The Council is also recommending the separation of the transmission and distribution businesses currently within Hydro One Networks. We would then dilute the government's interest in that resulting distribution business by bringing in private capital. We would retain a minority share. This new company would then have the capacity to undertake further consolidations. In these two moves - we would have created two champions of consolidation and the entrepreneurial base to grow. We would expect other municipalities to respond either by joining these entities or seek their own new partners - public or private. We would encourage both such moves.
Our preference would be to keep the distribution business essentially whole - not break it up. We recognize that there may be some limited circumstances where merging parts of the distribution business with specific municipal electrical utilities would foster further consolidation, and we will look at such proposals carefully. But we would resist cherry picking, as that would compromise the best outcome for taxpayers, and we would want to ensure that, if we sold any part, it would not reduce the value of the distribution business as a whole, and more importantly, not raise electricity rates from what they would have been.
Let me address a number of questions people might have from our recommendations. First around rates. People may wonder if allowing private ownership, even if it is only partial ownership of a distribution company, would cause rates to rise? Isn't that what occurred with the Renewable Energy contracts?
The two situations are quite different. In the latter case, Ontario was replacing low cost polluting coal plants with higher cost clean solar and wind power, and offered fixed price contracts, and no regulation as an inducement to build these supplies. Here we have a distributor who has been regulated, as are other electricity and gas utilities in the Province, for some time, and the rules will not change as a result of a change in the mix of ownership.
What about service levels? Will the public receive the same level of service if it is not 100% government-owned? Will rural areas not get the same services as urban areas?
The Ontario Energy Board monitors the performance of all regulated electricity utilities, both public and private, through transparent reporting requirements. The OEB also directly enforces customer service and service quality standards. Gas service is provided by private utilities in Ontario today, and there is no evidence they underserve the public. Whether public or private, electricity utilities have an obligation to serve and to offer connection to all parts of their service areas. The OEB-regulated rate of return on assets is the same for urban and rural areas. This won't change.
And finally, how would a sale impact the province's overall financial position? Won't selling an interest in the distribution businesses worsen the deficit? As I said earlier, there would be a reduction in the income the province gets from these companies, but the improvements we are proposing to make in the entities we recommend keeping are greater than the lost income.
Now, we are very sensitive to the labour issues such a change of ownership raises. There are a number of rights which have to be respected and a number of concerns which will arise. We believe we understand these concerns but also believe that it is very important to have the right process, to talk through and understand possible concerns with the goal of finding mutually acceptable solutions.
We would also insist on certain provisions to protect against undesirable changes in ownership in the future - so that the Province can safeguard against unintended consequences from diluting its ownership.
These moves would enable improvements in the efficiency of electricity distribution through economies of scale and reduced operating costs. Savings would ultimately be passed on to ratepayers because the companies would continue, and as I have said, to be regulated in the same manner as they are today. This passing on of savings is a crucial condition of any sale - it cannot cause rates to go up.
Let's now turn to OPG.
In our view, we see OPG as two very distinct businesses - a very complex nuclear business and a much more stable and straight forward hydro/thermal business.
We focused mostly on the non-nuclear business - looking at possible operating savings and whether there were assets that could be sold.
But let me make a few comments about the nuclear side - given its size and scope. The core issue is the refurbishment of Darlington. This is a project which carries enormous risks. Cost overruns can dwarf any savings which can be had elsewhere in the system.
We recommend a laser focus on making sure Darlington comes on line safely, on time, and on budget.
To that end, we propose that OPG should create an internal structure - as if they were two separate entities focused on their very different businesses. This could eventually lead to two separate organizations - a nuclear company with a Board that has predominantly large project management experience - and a non-nuclear company.
If you moved aggressively now, you would divert management away from its core issues. You would also deprive the nuclear company of the financial support of the non-nuclear business. So here too it's critical to make changes over time.
There are a number of things that OPG management can do to save money and improve performance. They agree in principle with our initial findings and will explore modifying their business plans to incorporate them over time. Any savings will ultimately accrue to the ratepayers. This is a good thing.
But when we take a step back, the savings which can be achieved without altering labour practices, or modifying total compensation packages, are relatively small, even if worth pursuing.
So we come back as to how to handle labour issues at all levels. As I said the current labour agreements are just that: agreements. They were agreed to at the bargaining table and should be changed at the bargaining table.
To understand how we got here one has to understand a very long history of 'give and take' in bargaining. But, 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.
The report published earlier this year by Jim Leech eloquently outlined the unsustainability of the pension plans in the electricity sector, including both OPG and Hydro One. Simply put: they are not consistent with public sector standards - and are not, in his expert view, stable.
We recognize that both union leaders and employees are concerned about the viability of these plans. We have a joint interest in finding a good, mutually agreed upon solution. There has been broad agreement on a process to deal with this conversation. We recommend the government put urgency behind this initiative and ensure a coordinated government response.
If these companies are to stay in the public sector and grow, we must also work at modernizing labour practices to improve productivity.
We need to initiate a dialogue with employees and the labour unions. We need to agree on the facts. We need to work together to understand the issues and the range of solutions.
So let me sum up where we are at the end of this first phase: we can do better. We can improve the operations of these entities to improve customer service, take pressure off rising electricity rates, and bring greater returns to the taxpayers.
If we reduce our ownership in our electrical distribution systems through injecting private capital and holding a minority share, we can help spur needed consolidation in the electrical distribution system to improve our electricity infrastructure.
At the same time we can add to our province's infrastructure with the funds realized, depending on the markets at the time, somewhere between $2 billion and $3 billion. These investments would create jobs directly and indirectly through removing impediments to economic growth.
We can leave the liquor monopolies in place - enjoy the benefits of our lower cost controlled model - but force the monopolies to change - to be focused on the customer. We can increase the returns to the province from these entities. In addition, we can introduce limited competition which further adds pressure for them to innovate.
We can do all this without increasing our expected debt levels or increasing the expected deficit.
All wins - for the ratepayers, consumers and taxpayers and the citizens of Ontario who need better infrastructure. We look forward to working with the various stakeholders to make these changes a reality. We only need the courage to move forward in a pragmatic way.