Commission on the Reform of Ontario's Public Services

Executive Summary
Sales of GBEs: Because these assets contribute substantial ongoing and growing revenues
to the province, a full divestiture of any or all of the GBEs would result in a lump-sum payment
to the province at the expense of future revenue streams. If sale proceeds were directed to
pay down provincial debt, Ontario could save on interest costs of up to four per cent, based on
recent bond yields. By comparison, GBEs provide a return on assets (ROA) of at least eight
per cent. Any full divestiture would have to overcome this spread to provide a fiscal benefit to
Ontario. Current circumstances do not appear to offer a convincing value proposition for the
province. Even so, Ontario should not close the door on new approaches that generate better
value out of the GBEs. Action, however, must not be driven by ideology. Any sale must rest on
overwhelming evidence that Ontario would benefit in the long run.
Improving GBE Operations: The GBEs may not be achieving their full potential because of
operational inefficiencies and because they are sometimes ordered to act counter to their
direct commercial interest.
There may be opportunities to improve LCBO returns through increased efficiencies and new
business opportunities. The Auditor General noted in his 2011 Annual Report that the LCBO
could more effectively use its purchasing power and improve the current mark-up structure
used to determine retail prices. The LCBO also has obligations that reduce profitability, such
as promoting Ontario producers. The policy merits of these measures should be balanced
against any reduced profitability. The LCBO may also be able to increase profits by opening
more stores.
The OLG provides significant net income to the province while maintaining social responsibility,
but efficiencies and other measures could improve the company’s margins. The OLG currently
operates two head offices in separate locations; it should close one. It operates two casinos
in the Niagara area; it should close one. Slot machines are directed to racetracks, where
subsidies are provided to the horse racing and breeding industry and municipalities, rather than
locations that would be more convenient and profitable; OLG would make much more money
if slots were permitted elsewhere, as they should be. The OLG gives lottery terminals to
merchants who sell tickets, an implicit subsidy. This practice too should cease.
The OPG and Hydro One occasionally endure government intervention that lacks a clear and
legitimate policy objective, to the potential fiscal detriment of the province. They should both
be encouraged to seek operational efficiencies in line with their industry’s best practices. In an
effort to reduce costs to consumers, the government occasionally intervenes in regulatory rate
filings for both OPG and Hydro One. As a result, electricity rates may become decoupled from
costs, providing a de facto subsidy to electricity consumers, and reducing both companies’ net
income and their contribution to provincial revenues.
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