16 December 2013

Inertia #nlpoli

In a letter last May to his federal counterpart, economic development minister Keith Hutchings described minimum processing requirements as the “only policy instrument within provincial jurisdiction that ensures fisheries resources adjacent to the province result in processing jobs in Newfoundland and Labrador.”

For those who do not know what they are,  minimum processing requirements are a condition that the provincial government sets on the licenses it gives to companies that process fish in the province.  The name says it all:  the companies have to process a certain amount of the fish in order to create jobs in fish plants around Newfoundland and Labrador.

There’s been a fairly steady row about processing rules over the past decade as the companies struggle to stay financially viable.  There are way too many plants for the amount of fish available and there are way too many people in the province drawing pathetically small wages slicing up the fish that comes ashore.  Companies can’t process fish profitably here and yet the provincial government insists they keep at bit.

The provincial politicians and bureaucrats know perfectly well that they need to change their ways. The politicians knew about it when they set about to destroy the only truly globally competitive fish company in the province.  They’ve known about it as the fought over exactly the same issue with the company the government’s policy favoured over exactly the same issue.

And yet the politicians persist with their bankrupt idea.

Make-work for bureaucrats and politicians

In the European trade talks, the provincial government agreed to drop minimum processing requirements for the Europeans but in other cases the rules stay.  The price for the change was $280 million, with the provincial government actually tossing in $120 million of its own.

Now it’s important to note here that the fishing industry key players – the fisheries union and the processors – all wanted to get rid of the restrictions.  The provincial fisheries minister noted in the House of Assembly that other provinces don’t use processing restrictions.  The Fisheries Council of Canada even spelled out the problem in plain English:  when you drive up the cost of production you actually lose more jobs than you create.

It’s also important to note that the provincial government also knew that lifting the processing restrictions wouldn’t put the workers involved out of jobs. To the contrary, as industry officials pointed out, there was little chance the Europeans would buy fish here and bring it home to process because of the costs involved.  It might actually be cheaper to process the fish in Newfoundland and Labrador.

And that, of course, is really confirmation that what the fisheries minister claimed in his letter just isn’t true. The provincial government could encourage businesses to create work here by removing restrictions that only serve to drive up costs.  What’s more, they could create economically sustainable jobs by eliminating restrictions altogether.

The current approach not only costs the industry, it costs government as well.  Some people are probably looking at the provincial government’s tactics and noting that they actually got money in exchange for giving up something that wasn’t really anything at all.  That’s certainly logic the Premier and her ministers used in the House.

But just think about it for a moment.  The $120 million the provincial government is tossing into the $400 million adjustment fund is yet another provincial government subsidy for the fishery.  It goes on top of the billions they and the feds have spent over the decades.  And, as everyone should recall, the provincial government is already spending more money than it can afford.

It makes no sense to pay to give up something you could have given up profitably without paying.  As such, the provincial government’s European trade policy makes no sense.  It makes no sense as an economic policy, nor does it make any sense as a social policy, nor does it make sense as a financial policy. 

Yet it persists.

Sometimes policies persist long beyond the point where they make sense because the people responsible for them can’t accept an alternative.  Consider that a couple of years ago the provincial government rejected an industry plan to restructure the fishery.  They said at the time it was because of cost.  The real reason – as we can see from their European trade logic – had nothing to do with cost.

The provincial government rejected change in the fishery because it would have fundamentally made the provincial fisheries department redundant.  The fisheries department is built on a half century of soviet-style control down to the most finite degree. When the provincial government was trumpeting its effort to cut down on red tape for business, the same government actually increased the red tape faced by fish processing companies.

Such a thing makes no sense if you are outside government, but it makes perfect sense inside government. 

The European trade policy payment makes sense inside government if you look at one of the things the provincial government got for itself out of the talks:  all through the pile of documents the Premier released you’ll see mention of an agreement between the provincial and federal fisheries department. 

That agreement included a commitment by the federal government to consult with the provincial government about sales of fish in Canadian waters to European trawlers.  You likely haven’t heard much talk of it publicly.  You likely won;t even find out exactly what the memorandum of understanding contains.  But for the politicians and bureaucrats that was perhaps one of the most important parts of the deal.  They only had to spend $120 million tax dollars to get it.

Governments do not operate on the basis of logic.  Now we think the opposite is true.  Politicians and bureaucrats like to tell us that their plans are all built on sound analysis and a thorough understanding of all the possible outcomes.

But it isn’t true.

The Soviets might come back

Governments operate on the basis of history and precedent.  They prefer to do what they did before rather than do something new.  Change is hard.  The most powerful force in the political universe is often inertia. 

This is not a new phenomenon.  In the late 1980s, the provincial government lobbied hard to get the North Atlantic Treaty Organization to build a base at Goose Bay so that it could train its pilots to fly at low levels to attack the Soviet Union in the case of war.  They spent money on junkets to take politicians to Europe on a lobbying campaign in the struggle between Goose Bay and another base in Goose Bay.

And then a funny thing happened.  The Soviet Union started to unravel. The Berlin Wall fell in 1989. NATO shifted from trying to decide where to build the base to whether to build it at all.  Within two years,  the Soviet military tired to oust Mikhail Gorbachev in a coup and instead wound up ending the Soviet Union as a country. 

In those two years after the fall of the Berlin Wall, though, provincial politicians and bureaucrats still planned for junkets so they could beat out the Turks for the base. Your humble e-scribbler sat through a few of them, as painful as they were.  It took a while to shut down the bureaucratic infrastructure that supported the NATO training base scheme.  The beast didn’t die, though.  Instead, it just morphed into other plans for military training that politicians and their lackeys continue to push today.  Inertia is a powerful force.

The lowest cost something or other

As much as you might be sick of it by now, you can find lots of inertia in Muskrat Falls.

A couple of weeks ago, Premier Kathy Dunderdale published a huge two page reply to a column by Telegram editor Russell Wangersky.  She mentioned the “lucrative” American markets for electricity. 
Small problem:  the markets for electricity in the United States haven’t been lucrative since the recession. They used to be lucrative.  They aren’t any more.  The recession started the drop in electricity prices.  The shale gas revolution finished the job. 

Back when Kathy Dunderdale and the Conservatives started talking about the Lower Churchill, they stood a chance of making money on exports if they could build a generating plant cheap enough. 
But by 2010,  the markets were so soft that Nalcor abandoned the export plan entirely.  They would build Muskrat Falls and make domestic consumers pay the whole cost.  They claimed it was the lowest cost option for supplying homes in Newfoundland with electricity.

When the provincial government sent the project to the public utilities board to look at, the board hired Manitoba Hydro International to study the project.  MHI compared the 2010 financial estimates to one other option.  They found that the project Nalcor had valued to the public at $5.0 billion for the dam and line to the island was about $2.2 billion cheaper than the one alternative they looked at.

MHI noted in its final report that the “current capital estimates are within the accuracy of an AACE Class 4 estimate which has a plus factor variance potential of as much as 50%. Should cost overruns reach that level, the difference between cumulative present worth values for each of the two Options would be less than $200 million in favour of the Infeed Option.” 

In another part of the report they noted the Infeed option was about $2.2 billion cheaper, due mainly to the difference in the price of fuel.

The most recent capital cost estimate for Muskrat Falls puts the line and dam at around $7.2 billion. That’s $2.2 billion higher than the estimate in 2010 and, as it turns out, is almost 50% higher than the old estimates.  Oil hasn’t jumped in price by the same amount, nor has gasoline or natural gas for that matter. Natural gas generators remain cheaper to than the Muskrat Falls plant.

Muskrat Falls isn’t the cheaper alternative of the two MHI looked at.  It isn’t the cheapest of any option any more, even if you use all the set-up scenarios that Nalcor and the provincial government used or claimed they used. 

And yet politicians keep talking about how cheap Muskrat Falls is, as though those old claims were still true.  Nalcor boss Ed Martin used the “cheap” argument this past weekend to justify the most expensive capital works project in the province’s history.  It’s the one Martin is personally responsible for and that he proudly asserts will go ahead.

Eight billion dollars is a lot of inertia.