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).
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.