Hazards of Handouts
Posted October 18, 2013
Imagine that in 2015, Shell Oil drills a successful oil well in the Shelburne Basin. Indicated reserves suggest that the provincial government can look forward to $4 billion in royalties.
Suppose that the government then announced that it was going to give $260 million to Shell. After all, the return on that “investment” would be excellent.
Voters and editorial writers would be outraged, not because the return was bad, but because the “investment” was unnecessary.
A parallel proposition was used by the NDP government, and supported by a Herald editorial on September 28, for the massive handout to Irving shipyards. To quote the editorial: “The province lends Irving $260 million today to receive $2.8 billion in cash flows over the next 19 years and $4 billion over the next 30 years. It looks like a reasonable deal.”
There are three questions. First, was the handout necessary to get the deal? There is plenty of evidence that it was not.
Irving won the competition by a wide margin, not surprising given Halifax has much more extensive experience than its competitors. Both Irving and Seaspan of Vancouver, the only credible competitor, indicated that they would charge nothing for necessary upgrades to their yards to handle the workload.
It was known that the support offered to Seaspan by British Columbia was $35 million for training and $5 million for improving productivity. Irving stands to make a lot of money building the ships. If it was have to receive any assistance, an amount comparable to Seaspan’s should have been enough.
Secondly, we need to look more closely at the cash flows to the province. Those provincial income taxes come from skilled employees who otherwise would not live here. They and their families will have the same needs for education, health care, transportation infrastructure, and all the other functions of government that other taxpayers use.
The arrangement allows Irving to reduce what it owes by 8.5% of the salaries paid, and Irving has said that they expect this to take care of the entire $260 million. A taxpayer with a spouse and two children making $56,000 per year can expect to pay $4,773 or about 8.5% in provincial income taxes, as well as some HST.
So all of that worker’s income taxes will go to pay for the gift to Irving until the entire loan has been forgiven. That family’s health care, education and other government services will be heavily subsidized by other taxpayers. Does that look like a reasonable deal?
Thirdly, how does this compare to payroll rebates as typically offered by NSBI? Superficially it is similar. Both rebates are only paid if the jobs are there.
The typical NSBI rebate is in the 7%-8% range. But it usually lasts for only the first five years, during which a workforce is building up to the ultimate level. There are no payments at all unless certain thresholds are met. The arrangement with Irving pays for up to 30 years and has no minimum thresholds. It is thus many times more generous.
So the deal Irving was unnecessarily generous, far from reasonable in relation to the taxes being recovered, and many times more expensive than a typical payroll rebate.
Politicians of all three parties have a long track record of poor investment choices. They often do not understand the real cost, or hope it won’t show up until after the next election. We should be glad that the new government has promised to end forgivable loans and corporate handouts, other than the payroll rebate program.
That being said, the Irving handout is far from the worst of the choices made in the last four years. Consider the example of Scanwood where a $4.7 million loan in 2010 was soon followed by bankruptcy and loss of all the jobs.
Loans have in the past often been made to companies with little realistic prospect for repayment or for retaining the jobs. When that occurs, it is even worse than a handout to a business that continues to employ people. It is therefore troubling that the Liberals propose to be a “lender of last resort” for repayable loans.
Every effort should be made to have loans provided by private sector lenders. If the government wants to subsidize interest payments, it can do so through the payroll rebate.
There will nevertheless be times when government has to be the lender for certain rural enterprises. The transaction should be examined for substantial capital investment by the borrowers, proven business model and management, satisfactory security, and value in the business from distinctive Nova Scotian advantages. In other words, a strong likelihood of repayment. The recent loan to Cabot Links met these criteria.
Government should only consider loans if recommended, based on the above criteria, by a knowledgeable arms length board, such as the one at Nova Scotia Business Inc. The answer will sometimes be “no”.
If “lender of last resort” means loans to weak borrowers, we can anticipate more poor choices by the incoming government, and resulting political damage.
If those are avoided, the Liberal policy position points in the right direction. It will take discipline to make it a success.