Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Monday, February 28, 2011

The Price of Ambition - The Lower Churchill Falls

Whenever some tin pot dictator in the world erects this tower, or that palace, we wonder how on earth will that be paid for. It's usually in some country that has a bank account supervised directly by the International Monetary Fund, and half the people are starving. We usually come to the quick assumption that the poor people in that country will be further enslaved to their debt, and have no chance to escape their debacle - or their dictator. Then there's us.

Newfoundland and Labrador's version of the dictator's palace is the proposed Lower Churchill development. A  massive dam to be built on the Churchill River to produce hydro electric power. On it's face a laudable endeavour. However, the financials just do not measure up. To begin with, this province already has the highest per capita debt in the country. Higher than Quebec's, and that is saying something. Just to put things in perspective, Newfoundland and Labrador's key economic numbers are: Total gross debt of over $11 billion dollars; and annual interest payments on debt approximately $1 billion dollars. That is as of today - without the Lower Churchill price tag.

Our population, the folks who pay the bills and debt, is changing for the worse. People living in the Province has declined since 1971 by 21,000 souls. However, that isn't the worst part. The bad part is that we have a severe upside-down population triangle. Normally, a healthy population has a great mass of young people as it's base, and a tiny amount of elderly as it's tip - the other ages fit in between. In our case, we have a large and growing mass of elderly as our tip, and a rapidly declining young population. By way of example, in 1971 people aged 0 - 4  numbered 62,136. Today they number 23,413. That is a 62% decline. For the age range of 0 - 20 the decline over the last 40 years is a staggering 47%.  In other words, our population is composed of older people. Shockingly, in 20 years from now, 50% of our current population will be either retired or deceased. Either way they will not be capable of paying much into the tax system to offset debt.

Then consider our "have" status. Oil resources accounted for approximately 40% of this province's general revenues for 2010.  The Atlantic Accord guaranteed that those revenues would not be clawed back until at least 2013. That is the year the federal government can start taking significant revenues from this province's offshore oil revenues. Prior to the most recent Accord, the federal government was clawing back close to 90% of the offshore revenues as equalization. It was our turn to pay in as opposed to taking out. Danny Williams stalled that process with his hard bargaining, but a stall is just that - a stall. It is important to remember that offshore oil legally belongs to the federal government, and those resources can be infringed upon almost at will - should they choose to do so. The bottom line is come 2013 that 40% of our revenue that funded this province for the last several years will be significantly reduced. The question then becomes: "How will we fund our current government let alone borrow for anything?"

As if to add insult to injury, the Upper Churchill Contract with Hydro Quebec automatically renews in 2016. That renewal gives Hydro Quebec almost full benefit of the power produced there, but at a 20% cut in the already insultingly low rate to Newfoundland and Labrador. Our provincial government appears resigned to allowing this contract to run it's course until 2041.

The problem with the Lower Churchill/Emera deal is that it can not make money. The hydro market is already flooded and, ironically, a massive amount of natural gas to power electricity generating stations will only add to that. Quebec is currently in the process of building four more dams on the Romaine River, which will ensure it stays that way.

The other problem with the deal is that it will, at the least, double or triple the provincial debt. Our portion of the project is officially pegged at $4.5 - 5 billion. The more likely number is $8 - 10 billion. When is the last time you heard of a large government funded project coming in on budget. The safer bet is to double the original figure. Then there is the cost of financing the debt. Just like your home mortgage, long term debts take on massive borrowing costs. You may have paid $100,000.00 for that house, but in twenty-five years you will have paid $300,000.00 with interest factored in. Apply those principles to the debt required to build the Lower Churchill and the overall cost would range from $24 - 30 billion dollars. Add that to our current gross debt, and assume no other deficits were incurred during that 30 year period, the total provincial debt would resemble $35 - 41 billion - not including interest on our current debt.

Unfortunately, we can not even hope to subsidize that cost with the Lower Churchill dam. Quebec is selling power into the US market at 6-8 cents per kwh in 35 year supply contracts. According to our provincial government, based on their $4.5 billion estimate to build the Lower Churchill, we can produce power for 14.3 cents per kwh. That is almost 50% higher than what Quebec is selling it for. If we try to sell that power to the US market we will take a 50% loss on the cost to produce it.

In reality, this provincial government does not have a hope in hell of funding this project without the federal government. Their claim that they will go forward with it whether the feds guarantee the loans or not is sheer bluff. The numbers do not lie. As we speak the federal government is going over the province's business plan. According to the Prime Minister, they want many financial and environmental questions answered - no doubt. I would be alarmed if they didn't. The Upper Churchill Contract was a hydro deal that sentenced this province to economic destitution by starving it of the potential revenues of it's own resources. The Lower Churchill would sentence the people to a type of economic insanity that is normally reserved for the guys in the Middle East, and their Palaces.  


  1. "The Atlantic Accord guaranteed that those revenues would not be clawed back until at least 2013. That is the year the federal government can start taking significant revenues from this province's offshore oil revenues."

    Brad, that is inaccurate.

    The federal government does not take any of the province's oil revenues. It never has. It never will.

  2. Mark, the federal government can and does clawback resources through the equalization program. A part of the multi-facetted Atlantic Accord was to stave off treating non-renewable resources as revenue for the purpose of calculating equalization. As the country enters into a worse fiscal position that idea can easily be tossed, and the result would be terrible for the Province's fiscal position. That is a reality in my opinion. It tried to clawback oil revenues through equalization, and it most definately will try again.

  3. That is what equalization is supposed to be. When you reach a certain level of income, equalization payments are revised to reflect the new reality. Only Quebec gets both.


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