The Default’s In the Details: How Predatory Lending Practices Doomed the Meadow Lake Pulp Mill

Alexandra Burnett, Commentary, Core Public Sector Reform, Public Sector

It has been decades since the Devine government was in power in Saskatchewan, but traces of his economic decisions are still remnant in the province today. The 1980s were full of economic turmoil for Saskatchewan, commodity price collapse, extreme weather conditions such as droughts, and new technological changes that were unforeseen during this time. However, these are not the reason why the Meadow Lake pulp mill was doomed from the beginning.

This past week, the Frontier Centre for Public Policy published the third paper in the Balancing Elephants series, authored by Gerard A. Lucyshyn. This paper examines the return on investment from the Meadow Lake Pulp Mill (MLPM), and many residents would be surprised at the actual numbers the government really lost.

According to Lucyshyn, if one were to listen to the data reported at the time, or information from defensive politicians, the loss would have seemed worse than it really was. However, the government of Saskatchewan only lost about 20% of what residents were led to believe: $259.1 M in investments, and $57.4 M in operational losses, over the 14-year period; the rest was unpaid interest that was overall written off.

Economic diversification through privatization was one of the main platform issues that the Devine government wanted to continue when elected in 1981. Pursuing economic diversification is a significant component of reaching long-range financial goals, while also reducing risk. In doing so, a large capital investment was required. The structure, or mechanism, by which this capital was borrowed that doomed the project from the very beginning.

In February 2018, the government of Saskatchewan will be implementing tighter restrictions on Payday loans for consumers, and rightfully so. With these tighter restrictions, consumers will have more protections from financing arrangements structured to take advantage of high-risk borrowers. However, in the case of the MLPM, the government of Saskatchewan was the predatory lender, and these restrictions do not apply to the government.

Predatory lending is any lending practice that imposes abusive or unfair loan terms on a borrower. Predatory loans are often structured in a manner that forces the borrower to continuously roll over their loans, in a vicious cycle of high interest rates and punitive fees. In Canada and the US, many jurisdictions have adopted anti-predatory lending laws in order to limit interest rates and fees to prevent borrowers from entering an unfair situation and a never-ending cycle of interest payments and fees.

Many people criticize the Devine government for the doomed project, but in reality, it was a wise decision at the time. International pulp prices were high, and GDP growth was returning to Saskatchewan. However, shortly after the Romanow government came into power in 1991, pulp prices plummeted. This, combined with reduced demand for pulp products in general meant domestic pulp producers had to compete on an even greater level, thanks to increased supply from China and Indonesia (who did not follow the same environmental or labour standards).

The Romanow government failed to adequately monitor and understand the commodity price and overall market fluctuations. Instead, the government focused on protecting the jobs created by the MLPM. As a result, the MLPM had no way to pay back the loans made by the government. The negative amortization lending practices of the Province meant MLPM was unable to repay the interest owed. The interest eventually inflated to approximately three times the principal ($649.7 million) that represents the largest “loss” of the MLPM project.

In reality, the Saskatchewan government should have monitored the overall economic situation closer, more specifically, the ever-changing commodity prices and underlying factors that determine commodity prices. When world pulp prices collapsed and the new digital age emerged, reducing the demand for pulp and the increasing supply of cheap pulp from Indonesia and China, the Saskatchewan government should not have continued to issue loans, rather they should have just written off the interest owed and stopped charging interest.

Despite the large sum of capital that was invested and lost, the MLPM case raises an important question: Should governments be in the business of lending money or should they leave lending to the banks?