When someone writes a letter to the editor about one of my columns, I don’t have any problem putting it on the same page my column runs on. Generally, I’ll let the writer say their piece — that’s how the conversation moves ahead.
I don’t usually jump right in to respond.
But I don’t feel like standing on the sidelines when what I’ve said is misrepresented, either intentionally or through some other misunderstanding. There’s a letter about my column last week directly below this column in The Telegram’s print edition — online, just look for the letter to the editor from Nalcor vice-president Derrick Sturge, headlined “Wangersky wrong about Muskrat Falls business case.” If you like, read that first.
What my column was about last week was whether or not it’s acceptable to essentially say how much the business world likes the business case for your pet project, when the facts are that they’re so well-insulated by the taxpayer that they admit they didn’t even look at the project.
Which the Muskrat Falls project’s lenders have done.
As I wrote last week: “Here's Steve Halliday, the managing director and head of global credit trading and distribution at TD. Asked about the structure of the Muskrat Falls financing arrangements by The Financial Post, he had this to say: ‘The benefit of the (federal loan) guarantee was that no one had to look at the merits of the underlying project. … That was a key consideration for us, not only in terms of how we rated the risk from a bank or underwriter perspective, but also in terms of making sure the investors agreed with our assessment, and counsel's assessment, as to the strength of the guarantee.’”
The Post went on in its Jan. 31 story: “What financial institution would want to bear that much risk in a complicated construction project with that much potential for surprise? The strength of the federal guarantee put the bank at ease.”
Sturge suggests I was mistaken, saying the business case was more than tested, fully checked by the federal government before the loan guarantee was signed.
All I can say about that is, right church, wrong pew. I wasn’t talking about the government of Canada.
I was talking about the suggestion that lending money to the project means the project had the general support of investors, when clearly it doesn’t.
I appreciate what Mr. Sturge is saying: the government of Canada is apparently more than satisfied with the details it and its advisers have examined the project. He is certainly well positioned to testify to their thoroughness.
As he puts it in his letter, the federal government had “comfort in the strength of the business case, financing structure and the engineering and execution capability of the project team.”
That being said, it’s interesting to consider whether the Canadian government was more concerned about the project itself, or about the ability of the project — whatever it costs — to be able to pay off any debt long before the loan guarantee gets called upon.
That’s probably why the loan guarantee document contains a clause that requires Nalcor and the provincial government to sign binding agreements and pass legislation that, among other things, will guarantee that “the regulated rate for Newfoundland and Labrador Hydro (NLH) will allow it to collect sufficient revenue in each year to enable NLH to recover those amounts incurred for the purchase and delivery of energy from Muskrat Falls,” including all the debt and capital costs.
In other words, the financing community hinges on the federal guarantee, and the federal guarantee hinges on a provincial commitment that, whatever Muskrat Falls costs, Hydro’s customers will pay for it and regulated rates will move to whatever is needed to meet that commitment.
Is the government of Canada happy with the project, and convinced that they are issuing a guarantee that they will never have to deliver on?
Would I be happy, if I was an investor?
Sure. I’d love to be able to invest in financing Muskrat Falls, putting whatever money I could dig up in a taxpayer-guaranteed investment paying almost two percentage points higher than you could get anywhere else.
That doesn’t mean I think the business case is perfect — it means I think my risk is absolutely, perfectly zero, even if the project blows apart. I could use the extra interest I was making to try and offset the unstoppable increase I’m going to see in my electric bills.
But don’t tell me that the lenders love the project, when they have already said the guarantees are so good that they didn’t even bother looking at it.
What lenders like about the project is not the project itself, but the limited risk they’re exposed to and the return they are absolutely guaranteed they’ll make. As I said last week, they love the guarantee. And who wouldn’t?
Russell Wangersky is The Telegram’s
editorial page editor. He can be reached by email at email@example.com.