Finding a Way Forward
Posted September 27, 2012
The resurrection of the deal with Stern on September 22 came as a considerable surprise. It will be even more surprising if it lasts for more than ten years without Stern asking for another handout.
There are two principal differences from the deal that collapsed the previous day. First, the $40 million that was to be a repayable loan will now be “earned” as long as the mill makes the expected electricity purchases from NSPI.
Secondly, a different arrangement is proposed to take advantage of the mill’s most valuable asset—its past tax losses. These can be used to reduce tax on future income by pooling Stern’s other properties in Canada with the mill. Nova Scotia will share in this bounty. If all goes well it is estimated to be worth $52 million to the province over the next ten years and $110 million to Stern, with lesser amounts possible in subsequent years. This is in addition to the subsidies of $124.5 million that the company will receive from the province. For this, Stern will pay $33 million.
So Stern, which appears to have little of its own money at risk, will benefit to the tune of about $200 million over the first ten years, an average of $20 million per year. Unless the market conditions for the mill improve a great deal over that decade, more subsidies will be demanded.
A breathing space has been purchased at very considerable expense. Government should use it to facilitate development of new industries with good future prospects, first and foremost in Cape Breton.
The best economic opportunities going forward will be those that take advantage of natural assets, with capable proponents who are willing to risk substantial amounts of their own capital:
- The proposed Melford terminal is being advanced, albeit slowly, by a credible group that has spent a lot of their own money without so far requesting any financial support. Their recent decision to finalize land purchases in Guysbrough County is further evidence of their serious interest. Government should be willing to help with infrastructure, for example with the rail connection, and by accelerating regulatory processes. In sharp contrast, the Sydney harbour dredging project has consumed $38 million of taxpayer money without any evidence of serious private sector participation.
- Likewise the Cabot Links resort is being led by one of North America’s most successful golf course developers. Again, a lot of private money is being invested. Cape Breton has the possibility of becoming a major golf destination. Government should be willing to help with infrastructure but should not subsidize operations.
- Extractive industries are fuelling all of the best performing provincial economies. Government should actively promote itself as open for business for mining as well as oil and gas exploration, including appropriately regulated fracking. One of the best investments by government in recent memory was the Play Fairway data gathering on offshore oil and gas prospects, which led to Shell’s recent spending commitment of almost $1 billion, with further possibilities to come. Perhaps a similar onshore survey could be done for both minerals and hydrocarbons, starting in Cape Breton.
- Corporations making major capital commitments have choices about where to do business. Government should seek to minimize taxation, keep electricity rates low, and avoid labour legislation that distresses major private sector employers. If the environment was more attractive the Michelin announcement might not have been cancelled.
None of this will produce quick results, which is why it should have started a year or more ago. The lessons from the Newpage mill should extend to every aspect of government activity and every part of the province. Government must focus its efforts on industries with good future prospects.
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