Thursday, 25 October 2012

THE ELUSIVE LOAN GUARANTEE

Prime Minister Stephen Harper pledged a federal loan guarantee, for the Muskrat Falls project or equivalent, during a 2011 campaign stop in St. John’s.

The guarantee still eludes.
The Premier is on tender hooks.  She can’t schedule the debate in the House of Assembly and MHI can’t complete its final report unless the guarantee arrives. Is this why the Premier was recently heard in the media voicing the possibility that the debate could take place without the guarantee?

To those who say that the Feds made a commitment, I’d say what about the “conditions” attached to the offer.
On Sept. 12, 2012 the CBC recorded federal Finance Minister, following a speech in St. John's, saying:  “We have a commitment…to provide the loan guarantee, and we have to work on the details, of course…we will honour the commitment”.

Two weeks later, on September 27, 2012, concerned that the guarantee (and hence, the project) was falling off the rails, Dunderdale raced off to Ottawa to meet with PM Harper but came up empty handed.
Now the end of October is upon us. Still, there is no loan guarantee, notwithstanding the new impetus ostensibly given federal bureaucrats by the Prime Minister.  

A CBC reporter quoted the Premier: ‘Sometimes when you get negotiators at a table for a certain length of time, it requires a push from above to get negotiations concluded'.   To what higher authority, was the Premier referring, I wonder?

The Agreement between the Province and the Feds allowed, inter alia, at least

 “… 8 weeks following access by the Government of Canada to the projects’ data room and detailed analyses and representations by credit rating agencies – agreement on term sheet for engagement with capital markets; and on or before financial close – completion of formal agreements for provision of the loan guarantee”.
 Overhanging the matter is the fact that Nova Scotia via Emera need not decide to become a partner in Muskrat until July 2014.  And Nalcor’s deal allows Emera to opt in (or not) at its “sole option”.  So the question of whether MF will truly be an inter-provincial deal will not be clear for another 21months. 

Does Dunderdale really think that the Feds are going to get snookered into providing a loan guarantee to NL, only to find that the Nova Scotia PUB has turned thumbs down on the deal or that Emera has found a less risky and cheaper source of power?
Let’s not forget, either, that the guarantee could, with overruns, involve up to 5 billion dollars.

I have a feeling that our blokes in Confederation Building are a bit naïve in their expectations of how the Federal Government operates.
The Feds usually let the Provinces know, that if there is any one to be snookered, it will not be them. And they have various ways of communicating that message.  Delay is a favourite.

In this case they have the added reason that prudence and good government requires that they wait for the NS PUB to render its decision. That pushes things out a couple of years at least.
Whatever the political logic of the Federal desire to become involve the MF project, other more general governance issues play the overriding role:

  1. A senior official in the Federal Department of Finance has to sign off on any recommendation to the Federal Cabinet for the loan guarantee.  That senior official is not paid to be fast, but he is expected to be thorough. While politicians may engage in political horse trading in the midst of an election, and use high sounding language about the desirability of ‘green’ energy, the grim Presbyterians in Finance will look at the brass tacks. 

Even the most junior senior official can see that NL has not exercised proper fiscal discipline in spite of its ‘have’ status.

The provincial debt is the third highest in Canada and our government cannot make critical decisions essential to deficit control.  How, then, can it be trusted to deal with a risk laden project, like MF, when the only party ‘bellying up to the bar’ is the island rate payer whose need for the power is far from clear?  

Will the Federal Government want to be complicit by enabling NL to take on the huge debt of MF?  The Feds are smarter than that.  I can’t imagine any senior official allowing NL to use Ottawa’s creditworthiness to ignore the basic rules of fiscal prudence.

  1. The Feds made clear, as noted above, that a condition of the guarantee includes a “…detailed analyses and representations by credit rating agencies...” 

This means that MF has also to pass the smell test on Wall Street. 

Unlike our own Deputy Minister of Finance who, in recent remarks to the Financial Management Institute, found it necessary to toe the Government line on MF, the financial specialists on Wall Street feel none of that pressure.  Bond rating agencies know their client lenders don’t like to be at the center of very public troubles.  They will ask a lot of questions about the fall-out that might ensue if this small economy gets in over its head on a risky project, notwithstanding a Federal Government loan guarantee; without a loan guarantee Ms. Dunderdale will have to get out her tin cup. 

  1. Wall Street is one group that will have no difficulty parsing the latest DBRS Report (See Finance Minister Gets A Downgrade).  One of those grim federal finance officials, to whom I earlier referred, will not be signing off until his/her back has been well covered.  He/she will also be mindful that an all seeing Auditor General will be assessing the MF file.
The Premier is well ahead of herself.  Has Ed Martin pushed too hard? The Nalcor head said he wanted project sanction by the end of the year.  What is the contingency plan? Likely, he will need one. 

Aw, shucks, who needs the Feds, anyway! Sure we’re rich, aren’t we?

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