The province of Newfoundland and Labrador is staring bankruptcy in the eye, according to recent news reports.
There are a variety of reasons, which are typical for provincial politics. Politicians hate to cut services, love to cut taxes and hate to increase taxes because voters react to all of those things.
Newfoundland has a few disadvantages that make running a government challenging.
With 521,542 people over 405,212 square kilometres, that’s easily the lowest population density among Canada’s provinces. That makes delivering education, transportation and other services more expensive.
With only seven members of Parliament, the province has little influence when it comes time for negotiations on the national scale.
Historically, the province relied on a single industry – fishing – and that collapsed nearly 30 years ago, leading to decade-long historic unemployment levels.
The province has since diversified. But now it receives a sizable portion of its revenue from the oil and gas industry. That leaves it susceptible to the wild swings of oil’s boom and bust cycles.
These factors have combined to make Newfoundland’s per capita provincial debt the highest of all of Canada’s provinces.
Newfoundland has paid down some of its debt in the last decade and hasn’t received 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 hydroelectricity project combined with a power link from Labrador to the island of Newfoundland have increased the province’s liabilities by almost 50%.
These projects are under the control of Nalcor, Newfoundland’s Crown energy corporation. It manages Newfoundland’s hydro projects, as well as the province’s stake in its offshore oil industry.
The combined projects were initially estimated to cost $6.2 billion. But ineptitude, inaccurate estimating and a lack of control have ballooned that to an estimated $12.7 billion. The projects’ estimated operating costs for the next 45 years appear to have increased as well.
This debt is beyond Nalcor’s ability to finance from existing revenue. The alternative is to increase the cost of electricity to the average homeowner dramatically. Electricity costs could jump to $0.78 from $0.13 a kilowatt hour (kWh).
With the new funding framework in place, rates would only increase slightly – except that the funding framework has a $4.8 billion gap that federal and provincial representatives have waved at, suggesting they would work it out in the details.
The province hopes the federal government can help with costs, even if the federal government isn’t eager to commit more money to bailing out the province. If the gap doesn’t get funded, households will see their rates first jump to an estimated $0.23 per kWh from $0.13.
Three other provinces are dealing with severe cost overruns at large power projects: B.C.’s Site C dam, Manitoba’s Keeyask dam and Ontario’s nuclear reactor refurbishments.
In some situations, Crown power companies have been accruing substantial debt that has been kept off the government’s books. That has allowed politicians to curry favour with voters 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);
•Hydro-Quebec ($45.8 billion); and
•NB Power ($5.3 billion).
Crown corporations should be independent and free from political interference. But instead they’ve been abused by political leaders to boost re-election chances. That results in capital projects that make no fiscal sense, pricing that’s too low to cover the costs of delivering the services and obfuscation of the books to hide the debt that we’ve accumulated.
The result?
Mammoth liabilities that put the fiscal stability of provincial governments at risk.
Should the federal government come to Newfoundland’s aid?
I can’t see how the province can stabilize its books and grow without assistance. But advancing aid to Newfoundland will mean the federal government will have to deal with similar issues in other provinces.
Perhaps now is the time to review how provinces have handled their Crown corporations and institute review boards free of political interference.
Should the federal government help stabilize provincial liabilities?
Not doing so risks higher servicing costs for public debt on already strained budgets. Provincial debt ratings are helped by the fact they’re within the larger framework of a strong country. Stepping in and helping balance the books of provinces could help those governments become stronger and more prosperous, benefiting the entire country.
But this can happen only if the provinces can guarantee that the same mistakes won’t be made again. And for that we need project review boards that operate independent of any party in power. •
Eamonn Brosnan is a research associate with the Frontier Centre for Public Policy.
