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)

Wednesday, May 25, 2011

Dunderdale and Company: The Deliberate Debt Plan

For anyone with a modest knowledge of economics it is clear the Lower Churchill development, as it is currently proposed, makes no financial sense. The power such a structure generates cannot be sold for a profit anywhere - other than the Island of Newfoundland. The only reason it can be sold at a profit on the Island is the trapped consumer group that needs power to live - Newfoundlanders. Of course that means a rate hike of at least 250%. Think that is overstating it? Consider that current projections have the cost of producing the power at 14.3 cents a kwh. Then add the 25% guaranteed return on operations that the government disclosed this week to the three main players. Then add the average cost overrun for dams of this nature - another 25%. Dams in general have cost overruns of 56%, but hydro dams are normally lower. That does not include cost overruns incurred on the sub-sea links. Bottom line is that a Newfoundlander now paying $200 a month for power will be looking at a bill in the $600 - $700 a month range. Of course that only holds true if our population stays the same, and we know it's declining.

Bottom line is the Lower Churchill is a financial nightmare in the making. So why do it? It can't be for economics - or can it? The big, and I mean huge, elephant in the closet is the equalization renegotiation of 2013. The federal government is facing a messy fight with provinces such as Saskatchewan and Alberta that want to pay less and are reducing or eliminating their debts versus provincial governments trying to abuse the system for their own gain. Governments that fall into that category include Quebec and now apparently Newfoundland and Labrador. For those thinking Quebec's strategy has been working remember Quebec is now the third most indebted political entity on the earth - per capita. The general strategy appears to be: "If we spend it fast enough, increase our debt to GDP ratio, we will qualify as have-nots while having all the benefits of haves." A strategy born from being a have-not for so long, but showing none of the maturity and responsibility that comes with its new found status - pun intended.

While that strategy may be successful in reducing or eliminating this province's contributions to the equalization program, it will kill the economy here through debt and taxation. The lack of fiscal responsibility of the Dunderdale government is already causing distortions in the economy. A really telling one was the announcement by Minister King of his disappointment with the private sector for not hiring first year apprentices. This provincial government has initiated a program to pay 90% of the wages for first year apprentices - yet very few takers. The problem is a lack of economic stability beyond the oil sector. Businesses are not spending as their confidence in this government's economic policy is paper thin - not enough for them to go out on the limb and hire these young people.

In many ways the Dunderdale government's approach to "managing" the economy resembles the efforts made by the old communist governments of the past. Five and eight year plans. Virtual control of the economy by massive growth in government. Trying to create an economy based on ideology as opposed to demand. In general, trying to control the economy and its growth rather than reducing its economic impact and allowing the private sector to breathe. The Lower Churchill falls mega bust falls into this way of thinking. We know from history that communist governments fell when the people finally lost confidence in their ability to properly administer the economy. Will we have to wait for things to get that bad here before we stop this destructive waste of our precious resources?

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