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Economist: A dodgy dam in Canada’s east

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Note from Graham Lane: Muskrat Falls is yet another example of government missing the market and wasting billions, to the cost of ratepayers. The Manitoba Hydro debacle has many of the features of Muskrat Fall’s folly, but is an even bigger waste.

We invite you to read this article published by The Economist on August 15, 2017

A LOT depends on the convoys of lorries now rumbling through the rugged interior of Labrador in eastern Canada. They are carrying equipment to be installed at Muskrat Falls, a hydroelectric project on the Churchill River.  The 824MW dam, scheduled to begin operation in 2020, is supposed to reduce Newfoundland and Labrador’s dependence on fossil fuels and produce a surplus for sale to neighbouring Nova Scotia. But it is shaping up to be the latest in a long series of failed schemes to improve the economy of Canada’s slowest-growing province.

In June the provincial government revealed that the project, including a transmission line to Newfoundland, would cost C$12.7bn ($10bn) to build, more than double the original estimate of C$5bn. To pay for that, electricity rates will nearly double to 23.3 cents per kilowatt hour by 2022, twice what Canadians now pay on average. Indigenous groups that live near the dam and other people downstream worry that rotting vegetation in the reservoir will release mercury and that the construction convoys will damage roads. Three Inuit protesters were arrested in July for blocking the lorries.

Ever since Newfoundland and Labrador joined Canada in 1949, con men and credulous politicians have pushed misguided projects to reduce its dependence on natural resources. Joey Smallwood, the province’s first premier, put public money into more than a dozen ventures that went bust, including a rubber-boot factory, a cotton mill, a chocolatier and a “high-end” knitwear-maker. The Come-by-Chance oil refinery, which cost taxpayers C$42m, declared bankruptcy three years after it opened in 1973. A hydroponic cucumber greenhouse, popularly known as Peckford’s Pickle Palace (for the premier who backed it with C$22m of taxpayers’ money), went bust in 1989. The history of failed investments has left the province’s government with Canada’s biggest public debt as a share of GDP. Wayne Johnston called his novel about the province, published in 1998, “The Colony of Unrequited Dreams”.

Churchill Falls, upriver from and much bigger than Muskrat Falls, is the biggest nightmare. A private firm, the British Newfoundland Development Corporation, built it on time and on budget and sold it in 1974 to the province’s government. The problem is the contract that the government signed with its neighbour, Quebec. It obliges Newfoundland and Labrador to sell electricity at C$2 per MWh, a fraction of its current market price, until 2041. The arrangement, which Newfoundland and Labrador agreed to in part because Quebec was the nearest customer, will yield a profit of C$26bn for Quebec’s government, which sells electricity to the United States. Newfoundland and Labrador will pocket just C$2bn over the life of the project. The province has tried repeatedly to break the deal in court and lost every time. Canada’s Supreme Court will hear an appeal, the third to the highest court on various aspects of the dispute, later this year.

None of these ventures freed the province from its dependence on commodities such as lumber and iron ore and their volatile prices. Over-fishing caused the cod industry to collapse in 1992. Offshore oil production, which began in 1997, sustained the economy until 2014, when oil prices plunged. At the same time, thousands of unemployed oil workers returned to Newfoundland and Labrador from Alberta, where an energy boom had also ended.

Tourism and a small tech industry are doing well but cannot make up for the oil slump. Whereas Canada is expected to grow faster than the rest of the G7 group of rich countries this year, Newfoundland and Labrador faces its second year of recession. Its unemployment rate is 14.9%, more than double the national average. Wade Locke, an economist at Memorial University in St John’s, the province’s capital, calls the economic situation “desperate”.

Muskrat Falls is the latest attempt to diversify out of commodities and jump free from the “geographical stranglehold of Quebec”, in the words of Danny Williams, the Conservative premier who authorised the project in 2010. A transmission line now being laid under the Cabot Strait will carry some of the surplus to Nova Scotia, bypassing the French-speaking province. Then it will pay off, Mr Williams insists.

Critics say that the former premier ignored cheaper options for producing power. Dwight Ball, his Liberal successor, calls Muskrat Falls “ill-conceived and reckless” and promises to conduct a forensic audit after it opens. “There’s a lot of lessons to be learned from the way [Newfoundland and Labrador] went about this,” says Dennis Browne, the province’s consumer advocate. He thinks it will learn from its mistakes. History suggests otherwise.

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