Chasing the Jobs – Tough Choices
Posted September 14, 2011
When important employers falter governments react with unusual speed. They often get it wrong at considerable cost to taxpayers. Great discipline is required.
In 1965 privately owned Dominion Steel and Coal Company indicated that it would be getting out of the coal and steel business in Cape Breton. The provincial and federal governments rushed to respond to the situation and both businesses soon became crown corporations. Given the devastating impact on Cape Breton’s economy and social fabric it is hard to imagine any other reaction. The plan was to resell to private interests within a year.
But that plan was never realized. Thirty-three years and more than $1 billion of taxpayer money later governments finally gave up and turned to the costly business of environmental clean-up of the steel plant. Cape Breton’s challenge was postponed, not solved. With the benefit of hindsight it is evident that governments did not get it right.
Nevertheless the scenario has been frequently repeated. To name just a few examples: Eastern Protein Foods (chicken processing), Eligna (wood pellets), hog farmers, Trenton Works (railcars), and most recently Scanwood (furniture manufacture). In every case the businesses failed in spite of government investment of millions of dollars.
This is usually not the fault of the workers or their managers. Rather it is because the fundamental economics of the businesses deteriorated. The steel plant was hurt by rising coal costs, distance from market, and a deteriorating plant. Wood pellet prices have softened while energy costs rise. Hog producers lost their federal feed subsidy. In recent years all have been hurt by a rising Canadian dollar.
This does not mean that government should never intervene, but considerable discipline is required.
The present situation is the NewPage paper mill in Port Hawkesbury, a hugely important source of jobs in the Strait area. The available information suggests that the problem is considerable . There is a pension deficit of $84.3 million or $130.4 million, depending on the measurement basis. NewPage claims it lost $50 million last year . And this is in spite of $10 million per year cash flow from an initiative by the previous government as well as concessions by workers and suppliers.
The paper business is difficult everywhere. Demand is shrinking as readers get more and more of their information electronically. Energy costs to producers are rising rapidly. Nova Scotia gets the vast majority of its electricity from fossil fuels, putting it at considerable disadvantage to provinces like Quebec with hydroelectric sources providing low and stable costs.
At the same time the mill has excellent technology, a capable and flexible workforce, access to high quality timber, and a conveniently located deep water port.
The government has made a good beginning by making it clear that provincial ownership is not an option while putting in place a short term plan to help suppliers and search for a buyer. But the hard part is to come. Several principals need to be followed in the coming months:
- Financial sustainability: Support during transition is appropriate but ultimately the business needs to be self-sufficient. That means no permanent cash subsidies but does not preclude favourable tax rates or easy terms for access to crown timber.
- A capable owner: Any new owner must know the business, make a substantial initial investment of working capital, and be financially capable of withstanding considerable fluctuations in financial results as prices for both paper and energy fluctuate. Otherwise the problem will repeat itself after a year or two.
- A fresh start: Successor rights for unions, which preserve collective bargaining outcomes through a change in ownership, make good sense for a successful company. But they do not make sense in the case of bankruptcy, particularly when taxpayer dollars are being used to help the transition. The province should require that a new buyer of NewPage should be able to negotiate new contracts that will make the business viable. Any payments for past or future pension obligations should be part of that negotiation.
- Transparency and fairness: Consideration should be given to more stable and competitive electricity rates. But there should not be an explicit subsidy from other power buyers — effectively that would be a tax disproportionately affecting low and middle income households. The full extent of government support must be visible to taxpayers and other employers. Government must be willing to provide comparable arrangements to other paper mills, subject to the other principles here being observed.
- Contingency plan: Given the paper industry’s challenges there is a very real possibility that no satisfactory solution will be found. A plan to deal with that possibility must be developed . It will be evident within twelve months whether that plan will need to be implemented.
All Nova Scotians should support the government’s efforts to manage a successful transition to new private sector ownership. But the end result must be viable, financially sustainable, and self-sufficient.