03 December 2012

The Risks Just Got Even Bigger #nlpoli #nspoli

While lots of people were busily cheering Friday’s announcement of a federal loan guarantee for Muskrat Falls, they probably noticed a small but very significant detail.

The loan guarantee doesn’t exist until Emera decides to sanction the Maritime Link.  Under the agreements announced earlier this year,  Emera has until July 2014 to opt in to the Maritime Link.  Until that happens, there is no loan guarantee for anyone.

That doesn’t mean that Newfoundland and Labrador will will put everything on hold until then.  Nosirreee.

 The Chronicle Herald’s Paul McLeod reported on Thursday evening:

One of the last remaining issues to be worked out was when the loan guarantee would be placed on the books. Newfoundland [sic] wanted to be able to start using the guarantee immediately, while Ottawa wanted a slower approach.

This issue did not affect Nova Scotia as much because construction on the subsea cable, being paid for by Emera, wouldn’t start until later.

Even as the deal seemed in jeopardy, observers seemed confident Nalcor CEO Ed Martin would not let the agreement fall through. In the end, Nalcor will use cash reserves to pay start-up costs, with the loan guarantee kicking in when borrowing starts.

In other words, Nalcor will start spending the $3.0 billion in oil windfalls that the provincial government has already committed to the project as the equity portion of the financing. They’ll start building even though they can’t say with certainty whether Emera will join the project in 2014 and trigger the loan guarantee as a result.

The current estimate for the Muskrat Falls dam and the Labrador-Island Link – both of which must be sanctioned before the maritime Link – is $6.2 billion with a possibility it will be 30% higher.  As it stands right now, the equity would cover roughly half the project.  The rest would have to come in the form of borrowing. 

Borrowing $3.2 billion is one thing.  But if the project costs escalate as they are likely to go up, then taxpayers would be on the hook for $5.0 billion or more in borrowing.  Without a loan guarantee, you’d have to add higher interest than with it and that’s if the provincial government and Nalcor could borrow more money at workable interest rates on top of the $12 billion provincial debt.

Potentially more significant would be the potential that Nalcor will be vulnerable to pressure from its partners in the meantime.  The threat of leaving Nalcor without a loan guarantee in 2014 gives Emera a powerful weapon,  just as BRINCO’s financial problems gave Hydro-Quebec a huge advantage in the negotiations for the 1969 power contract.  It also gives Hydro-Quebec a window in which to cut a deal with Emera that would be better than the one Emera has with Nalcor.

Odds are, as well, that Nova Scotia voters will go to the polls next year.  In the worst case scenario,  they may well vote before the July 2014 Emera option date.  Both opposition parties in Nova Scotia have been critical of the Muskrat Falls deal.



Jerry Bannister said...

McLeod's article available in today's online Chronicle Herald, "She won't make Joey’s mistake," is worth reading, too, because it's a useful reminder about how the legacies of Smallwood and Williams continue to shape the Muskrat Falls project.

I'm sure it looks different from the debating trenches in St. John's, but, from the sidelines in Halifax, there seems to be a danger of losing the forest in the trees. The intense debates over cost estimates, water rights, the CV's of the 2041 Group, and various agreement minutiae shouldn't take the place of a discussion of the larger political contexts and legacies. Anyone who thinks that Muskrat Falls is only about power needs and economic development is fooling him/herself.

One quote in particular from Premier Dunderdale stuck out in McLeod's piece: "Because Danny Williams was a fighter I'm going to go pick fights so I'll be seen in the same light as him? That, to me, is unethical."

Edward Hollett said...


Thanks for that. You are right. And in fact, I have TWO posts coming for tommorrow, previously unplanned, one of which will tackle this piece in the CH.

There are bigger themes and longer issues involved here, including the faulty understanding of Churchill Falls. As a popular metaphor or totem, CF is powerful, but since the popular understanding of CF is badly flawed, lots of crucial detail is lost that would help avoid the pitfalls today.

Anyway, that's stuff for tomorrow.

Jerry Bannister said...


Looking forward to it. I think that we need to be paying more careful attention to the actual rhetoric and logic used to sell Muskrat Falls.

Despite all the comments from the designated experts and the ever-growing twitterati, there has been relatively little substantive discussion of the history and politics of Muskrat Falls.

Premier Dunderdale herself has repeatedly made emphatic statements about the place of Muskrat Falls in NL history and her relationship to the legacies of both Smallwood and Williams: we should be paying more careful attention to what she is saying.