Provincial Governments and Hidden off the Book Debt

Commentary, Economy, Eamonn Brosnan

The province of Newfoundland and Labrador is staring bankruptcy in the eye. This is what we have heard in the news lately, and to be honest, it is not a fully incorrect assessment. As to the why, there is a mixture of reasons typical for provincial politics. Politicians hate to cut services, love to cut taxes, and hate to increase taxes because their voters react to all of those things. Politicians are not leaders; they are followers of trends. 

The province has a few disadvantages that make running a government challenging. First off, with 521,542 people in a province that covers 405,212 sq km, that leaves each person an average of .77 sq km. That is easily the lowest population density of the provinces (the territories being lower). Delivering services, be it education, transportation, communication, or health care, is more expensive. Secondly, with only 7 federal MP’s, the province has very little influence when it comes time for negotiations within the national scale. Thirdly, historically-speaking, the province had been reliant on a single industry, which collapsed nearly 30 years ago, leading to historic levels of unemployment for a decade. The province has since diversified, but now receives a sizable portion of its revenues from the oil and gas industry, which leaves them susceptible to the wild swings of oil’s boom and bust cycle.

These factors have combined to push the province’s per capita provincial debt to be the highest of all of Canada’s provinces, despite the facts that Newfoundland and Labrador has paid down some of the debt in the last decade and has not been receiving net payments from the federal equalization program during that period. However, a single source is threatening to push the province’s finances over the brink.

The ill-fated Muskrat Falls Project combined with a power link from Labrador to the island of Newfoundland have conspired to boost the province’s liabilities by almost 50%. Both of these projects are under the control of Nalcor, Newfoundland’s Crown energy corporation, which manages the province’s hydro projects as well as its stake in its offshore oil industry. The combined projects were initially estimated at $6.2 billion, but, due to ineptitude, inaccurate estimating, and a lack of control, have ballooned to an estimated $12.7 billion.

To make it worse, the estimated operating costs for the project for the next 45 years appear to have increased as well. This debt is beyond Nalcor’s ability to finance it from their hydro and oil revenues, without increasing the cost of electricity to the average homeowner dramatically. The province had been left with a scenario that would have seen electricity costs jump from 13c/kW to 78c/kW.

With the new funding framework in place, rates would only see small increases, except that the funding framework has a $4.8 billion gap that the federal and provincial representatives have hand waved and said they “will work it out in the details”. The province is hoping that the federal government can help with it, and the federal government is not eager to commit more money to bailing out the province. If this gap does not get funded, households will see their rates jump from 13c to an estimated 23c.

The real issue, though, is that Newfoundland and Labrador (NL) is not alone in this situation. Three other provinces are dealing with large power projects that have run severely over-budget; BC’s Site C Dam, Manitoba’s Keeyask Dam, and Ontario’s refurbishment of their nuclear reactors. In some situations, Crown power companies have been accruing substantial debt that has been kept off the government’s books, as politicians seek to curry favour with the voter base by keeping electricity rates artificially-low. Other Crown power corporations have significant debt: BC Hydro +$20 billion, SaskPower $7.2 billion, Manitoba Hydro +$19 billion, Quebec Hydro $45.8 billion, and NB Power $5.3 billion.

Crown corporations should be independent and free from political interference, but instead they have been abused by political leaders to boost re-election chances. Capital projects that make no fiscal sense, pricing that is too low to cover the costs of delivering the services, and obfuscation of the books to hide the debt that we have accumulated have all added to create mammoth liabilities that are putting the fiscal stability of provincial governments at risk.

Should the federal government come to NL’s aid?

I cannot see how the province will be able to stabilize their books and grow without assistance. Advancing aid to NL, on the other hand, will put the federal government on the hook for dealing with similar issues in a number of other provinces. Perhaps now is the time to review how provinces have been handling their Crown corporations and institute review boards that are free of political interference. Nalcor’s Muskrat Falls Project should never have received approval, based on what we now know was happening. But we also know that that information was available at the time, had someone without a vested interest in the project been able to review it.

Should the federal government help stabilize provincial liabilities? Not doing it risks higher servicing costs for public debt on already strained budgets and risks rating agencies taking a dimmer view to other province’s ratings. The provincial debt ratings are helped by the fact that they are within the larger framework of a strong federal country. Stepping in and helping balance the provinces could help those governments become stronger and more prosperous, benefiting the entire country, but only if they can guarantee that the same mistakes will not be made again in the future, and for that we need to have independent boards that are not beholden to the current political party in power.

 

Eamonn Brosnan is a research associate with the Frontier Centre for Public Policy.