Thursday, 8 November 2012

WHO PAYS THE COST OF MINING SUBSIDIES? YOU DO.

This piece contains many questions.  I suggest members of the public should start asking some of them. 

Let’s start here: should this Province give away its minerals essentially for the few jobs mining companies offer?  Should we insist on a royalty regime for oil and gas but give back to mining companies royalties we collect by subsidizing their power costs? 

These are critical public policy questions.   
NL has a history of very high unemployment rates reaching as high as 32.7% on a seasonally unadjusted basis in 1960.  That the Provincial Government would engage in subsidy programs to lessen this burden was understandable, notwithstanding the fact that some attempts to attract industry (the ERCO plant in Long Harbour being a case in point) went beyond all reason because the number and types of subsidies awarded made a mockery of any economic rationale. 

Yet, subsidies continue today even though the jobless rate in the Province is down to 12% (and the true rate is skewed by the seasonality of under employed fisher persons and plant workers).  In Labrador West, where the mines are proposed, the jobless rate is practically zero. 

Until the 1970s, mines were labour intensive operations.  Since then, technologies for resource extraction have advanced; mines are highly capital intensive rather than labour dependent.  In fact, once construction is complete, the number of workers required to operate a mine is relatively small and in any event many mines have a short lifespan (15 years in the case of Alderon).
A December 2008 Productivity Commission, Staff Working Paper entitled, “Productivity in the
Mining Industry: Measurement and Interpretation”, an independent group funded by the Australian Government, offers support for this observation:

Labour productivity in mining is high because the sector is relatively capital intensive. At the same time, labour productivity in mining is also more variable over time, again because labour represents a comparatively small share of total inputs to mining. Hence even relatively small changes to output or labour inputs from year to year can lead to comparatively large changes in the level of labour productivity”. The Report continues: “The longer-term growth in labour productivity in mining is mostly due to capital deepening (more capital available per worker hour).

 In Labrador West, any rationale for subsidizing a new mine is undermined by the fact that most of the ancillary services and supports are delivered not out of NL but out of Quebec across the border, in Sept. Ille.  Clearly, the current ‘screw Quebec’ mantra, enunciated by Premier Dunderdale, has little to do with policy and all to do with politics.
Most people would subscribe to the belief that sound public policies are created when their goals are clear, their origins well-grounded and when they have met certain tests as to whether they are appropriate and effective.

One of those tests might be the regional unemployment rate; but, at all times the net public benefit to the taxpayers must be considered.  In addition, if public money is being used to create a subsidy, the public should be told the amount, not that the information is secret because it would threaten private business interests.  In essence, the Premier is sending this message: we should underwrite mining interests but, as to how much, it’s none of your business.
It is one thing to offer an industry the incentive of surplus power, but when tax payers are required to underwrite the huge capital costs of power projects AND offer the power at a price lower than its marginal cost, you have to ask: do we need the project under those conditions? Whose interests are we serving? 

If the province had surplus cheap power it wanted to monetize, as Quebec had after the development of the huge James Bay Hydro Project, that approach might make sense but only if the export market cannot offer better net returns after a proper cost vs. benefit analysis of the mine or other industrial development has been completed.
To undertake a hydro project knowing, in advance, that the power is hugely expensive, as Muskrat Falls power certainly is (21.4 cents per KWh, in 2017, based upon the cost of service (COS) financing scheme, the financing approach used by business plus the cost of transmission and the original $6.2 billion estimate) is irresponsible. Not informing the public knowing how much the subsidy will cost them, is difficult to reconcile.  Indeed, it fails any test of governance appropriate in a democratic society.

Just remember that IOCC used its own capital to build Twin Falls as did Wabush Mines.  Vale supplied its power needs in Voisey’s Bay at its own cost, too.  Do you not see a disconnect between the actions of those investors and current bunch who have their hands out?
It is good to remember that subsidies represent part of the bounty a government collects to otherwise pay for public services.  If it doesn’t collect them, it must get the funds elsewhere or refuse to offer the services.

How much mining subsidy is too much? 
When the NL government forced Vale to establish a secondary processing facility in Long Harbour, the Province, for the first time, was benefitting from more than from a simple extraction process.  In Labrador West, Alderon is expecting electricity for pennies per KWh (actually ~4c/kWh) yet, they will have no secondary processing requirement. Alderon’s web site confirms the number on its web site.  See good access to low cost (~4c/kWh) electricity produced at Churchill Falls in its Business Plan.

In essence then, in place of the mining entities paying us for removing our resources, we want to subsidize them to do it!

What is the source of this entitlement? If it were being subsidized by the World Bank or some UN Agency on behalf of a third world country, with high endemic unemployment, some justification may be noted. But, NL is not the third world.
Indeed, the minerals are in situ.  They are here.  They must be exploited here whether mining companies want to or not. That is our advantage.

What is in our psychic that motivates us to want to give them away? Alderon makes the boast, on its Web Site, an internal rate of return (IRR) of 40.2%.  The capital cost of the mine is estimated to be amortized within a period of 2.5 years. Does this sound like an operation that requires a subsidy from ordinary tax payers?
Other public policy questions demand debate.  Is any subsidy justified and on what basis?

Should subsidies, when justified, have a finite term?
A lot of questions! 

If you ask them loudly and often, and demand the answers, just possibly the rationale for Muskrat Falls could change again.  

No comments:

Post a Comment