Has Wynne’s Ontario Liberal Government Understated Ontario’s Total Debt?

Currently,  according to the Ontario Financing Authority and the Budget of 2014,  the Province of Ontario owes a total of $295.8 billion in debt- consisting of $282.9 billion in public debt to the general public and institutions and $12.9 billion in non-public debt to public sector pension funds in Ontario and the Canada Pension Plan Investment Board (CPPIB).

This figure of $295.8 billion which is a huge number in itself,  may misrepresent the true and actual nature of Ontario’s financial obligations- which amount may be at least $42 billion higher, and may be greater by many more unreported and undisclosed $ billions.Let me explain.

Infrastructure Ontario (IO) is an Ontario Crown Corporation, which oversees the initiation , development and construction of public institutional buildings and projects in Ontario, including; new hospitals, expansion of existing hospitals, expansion of universities, new courthouses and other Ontario public centres.

According to Infrastructure Ontario’s website, since 2006,  IO has brought about $42 billion in capital projects to market. Such projects include: the North Bay Regional Healthcare Centre, Sunnybrook Health Science Centre,  the Roy McMurtry Youth Centre and the Durham Consolidated Courthouse.

This sum of $42 billion has in practice and in fact become the financial responsibility of the province of Ontario and as a result, should be treated as part of Ontario’s total debt.

Under IO’s Alternate Finance and Procurement Program (AFP),( but more popularly known as public/private project (P3) program),  the Liberal government under McGuinty and now Wynne set out to build hospitals, universities and courthouses, by trying to shift the construction risk and financing risk from the Ontario government to the private sector.

Historically, prior to the McGuinty/Wynne governments, the Ontario government would go out to the public bond and institutional markets and borrow very low interest rate funds to finance its capital projects. These borrowed funds would be added to the province’s debt.The Government would retain outside third parties to build the public buildings and Ontario would retain ownership and operate the said buildings.

Under the AFP model, the Liberal government developed a scheme by which new public buildings( or existing public institution expansions)  would be built, but financed, constructed and operated by the private sector, and very importantly, without the Ontario government adding to its increasing overall debt.

Typically, Infrastructure Ontario, through public tender, selects a single purpose shell company made of a group of finance, design, construction and operational partners. This shell company then typically goes out to public/ private bond and institutional markets and raises 100% financing, in order to fund the construction of the project, on the basis, that once completed and operational, Ontario government grants to the public institution would be used to pay interest on the 30-35 year bonds.

Because these public/private projects have the support and authorization of the Ontario government, these shell companies are able to obtain 100% financing without putting any “skin in the game”, that is, their own hard cash equity and without providing their own corporate guarantees.

Because the Ontario government is neither the direct borrower (debtor under the bond) or a guarantor of the bond, legally these bonds are not included in Ontario’s overall government debt.
Pretty clever.

Except on closer inspection and in practice, this scheme seems to be more like “off the public books” financing.

Because in actual fact and practice, the Ontario government is still in control of,  and responsible for, these public buildings and institutions, financially and is still ultimately on the financial hook for ongoing interest payments of the bonds and ultimately repayment of these bonds and for any defaults under these bonds.

Firstly, whether a hospital is owned by the Ontario government or is owned/operated by a private shell company, the interest payments on the bond, come from the same source, i.e. government revenues collected as personal and corporate taxes- which are in turn are appropriated or granted to the said hospital by the Ontario government.

Secondly, in the event of a default in the bond, or the bondholder requires the repayment of the bond on maturity, because the private shell company has no equity or guarantees at risk, it will do nothing. The ultimate responsibility will fall to the Ontario government to take over the facility or refinance the bond – because no Ontario government would permit a bondholder to take over a public hospital, university, school or courthouse due to a default in the bond, notwithstanding that the Ontario government is neither a borrower or guarantor of the bond.

Recall the examples of Ornge, the air ambulance and ground transportation service for Ontario and the cancelled Mississauga gas plant.

In the case of Ornge,  on the basis of annual legislated grants to its public service company, Ornge, set up separate private companies and went out to the private markets and borrowed about $250 million to buy helicopters and aircraft to expand Ornge and another $25 million to buy a new Mississauga head office building.

When Ornge’s executives were terminated for cause, in order to maintain the public Ornge service and Ontario’s reputation in the capital and bond markets, the Liberal government took over the payment of both loans, notwithstanding that the province of Ontario was neither a borrower or guarantor of either loan.

Similarly, though the Ontario government was not a party to the construction loan agreement between the Mississauga gas plant developer and its American lender, the Liberal government agreed to pay the American lender well in excess of what it was owed as a result of the cancellation.

Recently, the Ontario government stepped in and agreed to purchase a 70% vacant MaRS II building, purportedly to protect MaRS’ work on behalf of Ontario, notwithstanding that Ontario was neither a debtor or guarantor, and that IO was the actual construction lender in this case!

The Ontario Auditor General, in her recent report called into question the necessity of the Wynne Government paying about $70 million to the American real estate developer, instead of just foreclosing on its loan and extinguishing the entire equity stake of this American investor in the infamous MaR2 Tower, aka, “The White Elephant on College Street.“

For the sake of accurate and honest government financial reporting and accounting, the same auditor should review the whole $42 billion AFP program with a view to properly bringing those financial obligations and any other wonky loans (  incurred by Ontario green energy wind farms and solar companies), back on the Ontario government books and treated as Ontario debt, as the Auditor General did with $800 million of Catholic School Board debt in 2009.

About $800 million of Catholic School Board debt, ( which was originally issued and treated as off balance sheet financing) was deemed by the Auditor General in 2009 to be in reality debt of the province of Ontario.

If Ontario’s true financial debt picture is closer to $350 billion than $300 billion, then Ontario is much closer to hitting the fiscal wall, and appropriate fiscal action should be taken sooner, than later.

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