On Shutting Down Muskrat Falls

I’ve been super selfish the last few days; LGW is being good about it, but I can’t imagine that I’ve been easy to live with as blow after blow after blow rained down on the heads of Newfoundlanders and Labradorians over the course of this week. I’ve been trying to engage. I’m on the tweeterbox watching #nlpoli; I’m on the Facebooks watching protest after protest crop up on my feed; I’m on Change starting and signing petitions.

As I’ve done all that, my ardor has cooled.

Not against corruption, mind. That shit cannot stand.

But I did the math, and here’s how it goes:

  • Right now Newfoundland and Labrador has about 7 billion dollars in debt, and it pays somewhere between 500 and 900 million in interest (which is credit card-level bad financing, so…good job on that, previous governments)
  • If we raise the deficit a la Alberta or even just leave it untouched, we’re adding 2-3 billion to the debt every year. That means 150-400 million dollars per year extra in interest.
  • In the absence of miraculous return on investment (a la last year’s Liberal campaign), we’re going to see massive losses in the public sector, either right now or as the interest on our debt begins to outstrip our ability to pay it.
  • That means some very bad years ahead. Taxes will continue to rise, services will be gutted, people are going to suffer.
  • People are going to leave.
  • People are going to be left behind.

Which brings us to Muskrat Falls. Theoretically, the project has spent approximately $4 billion of $7.5 billion, though there is a report which indicates that estimate of the cost is not a useful one. This year the government will transfer 1.3 billion to Nalcor, which most observers expect will primarily go to costs associated with Muskrat Falls. Given the project is costing more than 100 million a month, that seems reasonable.

The project was originally based on a $6.2 billion cost estimate, with a low-interest-enabling guarantee from the Government of Canada, meaning that the first $5 billion shouldn’t cost us a lot (~190 million a year). After that we’re back to provincial borrowing, which we’ve already observed has a pretty bad associated interest rate. So we have $2.5 billion so far, with likely expansion of that over the course of the rest of the project.

That’s bad.

If you go through appendix IV of the Estimates document you can see that the government is counting on pretty low rates for the next 30 years or so, but if we’re conservative, we need to look at at least 4% interest on the money we borrow now. That means our $2.5 billion turns into 100M in additional interest. If we look at the overall debt and take the far more conservative ratio from the Fraser Institute and our recent credit rating downgrade, then we’re going to be looking at closer to $200M or more.

Just as importantly, there’s more bad news to come thanks to that Ernst and Young report. We don’t even know what that looks like, but a lot of folks are expecting somewhere in the neighbourhood of $2 billion in additional costs. That’s another 1-200M in interest.

Remember at this point that the entire project was “lowest cost” by $2.4 billion. Even if one discounts the drop in oil prices (I’d like to do that just because I’m a greenie), that means we’re getting really close to the marginal case already, and we’re almost certainly about to hop neatly across that line.

Also remember that the dividends to the province on Muskrat Falls are projected at 400-500M annually. If we compare the interest on the loans to the payout, we’re right at the place now where the interest on further spending – not sunk costs, just the money still remaining to be spent – outweighs any return we might make unless we jack up taxes far enough to pay off the whole principal of that borrowing quickly.

Muskrat won’t help with that, because its return  will go to the interest. We’ll be paying that out of taxes and other public revenues.

On the flip side, there are going to be costs associated with cancellation. The looming question is this: How much will it cost to terminate all contracts and renege on our commitments to Emera and Nova Scotia? It seems possible that those could rise to $2-4 billion, which puts the cost of stopping close enough to the cost of finishing that it doesn’t make sense not to keep going.  I’m really hoping that that’s the calculation the premier and Minister Bennett made in determining that stopping the project doesn’t make sense.

But part of me thinks that we’re looking at spending that won’t make sense.

It’s been a long time coming; I’ve been reading the usual suspects and disagreeing with them for years. There are a lot of voices against the project, none of them saying quite the same thing, many of them prone to misstating facts about the project. But I’m at the point where I think it’s time to open the books completely, to state exactly what’s being spent and what’s expected to come back to haunt us. Ed Martin’s gone, and his words no longer bear weight.

It’s time to let the rest of us in.