Are the UCP good fiscal managers?

Updated 9 February 2021

On Monday, 18 January Service Alberta quietly issued a request for expressions of interest (REOI) to sell the data contained in systems from the Province’s Land Titles Office (LTO), Personal Property Registry (PPR) information, and Corporate Registry data (COR). This Request was reported by the CBC on 21 January and Postmedia on 23 January. The Service Alberta ministry is run by Nate Glubish, the UCP member from Strathcona-Sherwood Park.  (Picture source:Wikipedia)

Background

There has been little comment on this move by the Alberta government in the ten days or so since the REOI. The intent of the process is to determine the interest by private sector actors in buying an “exclusive 35-year concession” to sell information to registries from the databases of the Province’s LTO, PPR, and COR offices. CIBC Capital Markets has been engaged to facilitate any transactions that might arise to meet the provincial government’s objective to monetize one of the most lucrative of its databases.  It is important to stress that  the LTO, COR, and  PPR are foundations of our system of private property.

What the REOI says

Land Titles Registry office generates about $80 million per annum, including 600,000 annual registrations, 2.8 million searches and hosts offices in Calgary and Edmonton. Corporate Registry generates about $35 million in revenue with a remarkable 1.4 million annual registrations and 200,000 searches.  The Personal Property Registry has revenue of $7.4 million, with annual searches of about 1.2 million and registrations of one million. (REOI can be seen  at bottom of article.) 

According to the REOI, prepared by CIBC, the “key investment highlights” include: 

1. Exclusive 35-year concession to operate an essential services business in Alberta;
2. professional user base spanning a wide range of critical industries in province;
3. strong underlying market dynamics supporting long-term growth;
4. robust financial profits with highly stable cash flow stream; 
5. strong contractual framework with public private partnership-like protections;
6. Ability to leverage data to develop new product offerings and drive incremental revenue;
7. unique opportunity to acquire a core infrastructure business of scale in Canada; and strong leadership team with significant registry experience.

The consolidated EBITDA (earnings before income tax, debt and amortization is estimated at about $90 million in 2021 which is forecast to rise broadly with the consumer price index. 

The Province’s objectives of the province selling this “concession” include:

1. Maximize sales value and proceeds;
2. modernize the technology infrastructure supporting the Registries;
3. promote greater investment in systems and operational improvement to deliver enhanced registry services;
4. protect the integrity, security and reliability of registry information and data;
5. ensure legislation and regulatory frameworks enable consumers and businesses to operate in an efficient, fair, and openly competitive market; and
6. ensure an orderly transition to the Concessionaire.

With respect to the economic value of this concession, its customer base would remain financial institutions, corporations and law firms- in short a captive audience with deep pockets and the ability to transfer costs to mortgagors, auto loan companies, clients, etc. The successful purchaser is buying a steady, safe, ever rising cash flow. The buyer also has the opportunity to increase profit margins through better data base management, the development of new products and services, and seemingly an ability, within any government regulations, to use these massive data bases to extract more value than is currently extracted. 

In the Province’s objectives for sale, there is a stunning absence of attention to employees who may be inconvenienced or lose their jobs.  Already, the Alberta Union of Provincial Employees fears job losses. Kevin Barry, Vice-President of AUPE suggested privatization could mean higher fees.  He was also puzzled why a government short of revenue would consider selling a cash generator. A fair question.

Secondly, there seems to be little or no interest in keeping jobs located in Alberta.  This may be because the deep pockets from Teranet (Ontario and Manitoba registries) will be prepared to pay to add scale for “greater investment in systems and operational improvement to deliver enhanced registry.”  There seems to be little recognition in the inherent value of mining the databases and upgrading technology to improve both services and create more jobs in the province. The absence of economic development potential is striking given the primacy of the Economic Recovery Plan.  Did it not occur to the government that investing in Alberta people and systems the potential for long-term gains would or could outweigh the long-term losses if the successful bidder is from outside the province. 

Of course, there are constraints in governmental procurement for discriminating against out-of-province bidders and that could be the reason that economic development criteria are absent. 

However, existing businesses like Teranet and Regina-based Information Service Corporation (ISC), which can use their scale and understanding of the business, will be able to pay more for this cash flow, all things being equal (e.g. corporations with existing “concessions”).

Time Frame

The closing time for submissions of Expressions of Interest is Friday 12 February.  The qualifications of bidders include: demonstrated financial capacity; operational capabilities; do not face legal constraints to bid for the concession (e.g. have not been legally sanctioned). These criteria are essential but make it more likely that incumbents will be invited into further rounds in this process. In addition, a  Confidentially and Non-disclosure agreement (NDA) must be signed. 

The second phase of the sales process would involve a Request for non-binding Indicative Proposals (REIP) for qualified respondents. This will give these organizations access to detailed information about the registries – a “virtual data room.”  This process is expected to be complete by the end of March. The third and final stage is a request for binding proposals (RBP) to “selected respondents.”  This stage is expected to be completed by “late Q2 or early Q3 2021.”  This is an ambitious time frame and will require any successful bidder to have significant resources to devote a team of financial, technical, and legal resources. This aggressive time frame will therefore limit the potential pool of bidders. 

This potentially lucrative deal which could close as early as the end of the year, meaning the concessionaire  we all take over by the end of 2022, so the deal will be consummated before the next election.

In addition to Teranet and ISC, there are a number of  other parties interested in the bid, including Alberta’s largest credit union -SERVUS, the Alberta Motor Association,  a raft of Alberta-based numbered companies,  Alberta Blue Cross, the Alberta Real Estate Association,  Aon Reed Stenhouse Inc.,a number of Alberta and national law firms,  CGI the Quebec-based IT servicer,  PricewaterhouseCoopers LLP, and Stantec.  

Lobbying

Already, registered lobbyists working on behalf of Teranet (Maple Leaf Strategies) and Information Services Corporation (ISC) (being advised by Wellington Advisory),  the 60 per cent privatized registry in Saskatchewan, have been engaged.

The Vancouver partner of Maple Leaf Strategies, Dimitri Pantazopoulus, according to his biography “he has had a number of notable successes including acting as chief strategist and pollster on Premier Jason Kenney’s successful election in Alberta in 2019, as well as Kenney’s campaign for leadership of the United Conservative Party of Alberta in 2017.”  The by-line for Maple Leaf Strategies is “Experts who deliver.” 

What might these combined registries be worth?

The most common way to estimate the worth of these Registries would be a net present value (NPV) calculation which equates the stream of cash flow into the future to a present value.  The most important determinants in the calculation are: 1) the series of annual cash flows; and 2) the discount rate. Cash flow will depend on how efficiently the buyer can integrate the Alberta data bases into existing systems or how to efficiently transform the legacy systems of Alberta registries into an updated system which avails the buyers of opportunities to save costs (e.g., labour) and develop new products and services. Other methods include multiples of EBITDA and comparables. Since the sale of registries is rare and Teranet and ISC are not public issuers, data on comparables is not  widely available.

The discount rate is the rate that the buyer uses to equate with its desired rate of return. The rate of return will depend on the purchasers “cost of equity” which is a combined cost of its equity and its debt.  This factor in turn depends on how much the borrower will pay on its debt and how much debt versus equity it will commit to the purchase. In theory, the cost of borrowing for a purchase of this sort- stable, cash flows- would be close to  the so-called risk free rate that governments can borrow at. For 30-year money, the Government of Canada borrows at 1.5 per cent so the cost of money to the successful bidder should be no more than 2.5 to 3 per cent for long-term investment rated debt. The cost of equity for a Teranet or ISC are unknown since they do not report publicly. However an adequate return on equity for a utility-like entity might be 8 to 10 per cent.  Thus a purchase which is half financed by debt would seek a return of say seven to eight per cent. Assuming net cash flows increase by two per cent per annum, the payment expected from the government would be at least $1.6 billion.   

Using the EBITDA metric multiples- one could envisage a range of 10 to 25 times yielding between $1 and $2.5 billion. This figure depends on whether you regard the investment as a utility or a professional information services. This process therefore is a massive transaction and its successful culmination will reflect on the UCP government’s competence as good fiscal managers. 

A key consideration would be the assessments by the bidders on how much it will cost to rehabilitate the IT systems,  how to maximize efficiencies, how to manage a unionized work force, how to automate manual systems, and therefore how much new investment and continuing capital investment is necessary.  Knowledge of these registry systems clearly gives an advantage to the incumbents in the field like Teranet and ISC. However organizations like Alberta Blue Cross manage large databases and Alberta Motor Association has considerable experience running the retail side of registries. 

Issues

How should the Alberta government as seller evaluate the worth of this very long-term expropriation-proof cash flow?  The exclusive 35-year concession means should a future government wish to buy back the concession, it will pay through the nose, possibly incurring years of incremental legal costs. How will future governments really know whether in 35 years the IT system that’s left won’t be run down if the government if forces to take the system back? What will regulations look like in 30 years?  Therefore, taxpayers should expect a significant premium for this extraordinary asset.

The request for expressions of interest is being run by CIBC Capital Markets which will mean advisory costs being either a percentage of selling price, a fixed fee, or a combination.   It will be a handsome fee if the CIBC team can bring the transaction to closing.

On the accounting side, the upfront payment will have to be amortized over the 35 years, similar to the liability for Public Private Partnerships (P3) being recorded in the government’s accounts.  There may be, on sale, an interpretation that if the book value of registries is zero, then the full amount could be taken into revenue as a realization of a gain on sale.  However, this would not make sense as the government is forgoing significant future revenue over a very long period of time.

A key question for the union: which employees will be kept on? What assurances will the Government seek, if any,  to look after its former employees? Will some of the employees remain unionized? What will happen to management staff in the registries? Will jobs and systems development stay in the province? 

The government and bureaucrats have not done a good job at upgrading system, etc.  What is the potential use of blockchain technologies? Blockchain advocates have pointed to the opportunities inherent in systems that guarantee finality and authenticity of records on blockchains. Whether use of such technologies is practical and cost is both an opportunity to be an industry leader or a deep spending hole.  Partnerships with universities to exploit this technology may be a hidden gem in this transaction. 

If the successful bidder is Teranet the Ontario based firm, this likely means highly skilled development jobs will, or may, be lost to other province’s work forces. However, if an Alberta-based firm is successful then it could be a critical component of an AI, machine learning, blockchain nexus. This may be the best outcome for Alberta taxpayers and Alberta’s economy.

Are the UCP good fiscal managers?

The sale or proposed sale of Alberta registries is an expression of the UCP’s ideological bias as well as another test of what the government’s fiscal and economic objectives are.  Thus far, the Keystone XL venture and AIMCo’s mis-steps do not accord the government passing grades.

From a fiscal standpoint, the government is faced with a classic sell or invest decision. There are precedents, including the privatization of AGT/TELUS, where this choice was deliberated upon.   For  TELUS, the issue was framed in the context of large, upcoming capital investments for mobility that the government would have to fund.  Was the Alberta government willing to continue to invest in AGT or monetize its interest?  Don Getty’s government decided to sell revealing difficulties at AGT’s 50 per cent share in NovaTel.  Was it the right choice?  Clearly for those that bought into the public offering with the Alberta preference, it was.  For the Alberta taxpayers, the book has yet to be written. One clear downside was the loss of a head office to Burnaby when BC Tel and TELUS were put together.

In the case of the registries, the government’s realization on sale with mean that it will have the cash in fiscal 2021-22 and therefore its borrowing requirements will be lessened by the sales price received. However, the cost of borrowing $1.5 billion will be about 3 per cent per annum or $45 million a year while its revenue declines will decline by $120 million. However if one adds the cost of investing $100 to $300 million to upgrade the system, the decision may appear less foolish.  It’s the old “bird in the hand or two in the bush.” 

What is most telling, and more opaque, are the issues around jobs, future local employment, diversification offered by IT development, service levels, and fees to Alberta businesses and individuals. This process deserves to be closely watched. While the appointment of CIBC promises to insulate the politicians from the bidders, the time frame for a final decision and closing seems inappropriately hasty for such a Crown jewel. 

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