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Letter: Government has no business in business


Elected officials should know that propping up private businesses with public money is a bad idea. These days, government officials like to call it “investment,” but they are still ultimately handouts.

Yet the Annieopsquotch Mountain of public debt and failed, state-supported businesses — from rubber boot factories and cucumber greenhouses to paper mills — only confirm little or no return on these investments in the long run. 

Politically, subsidies are seductive. They save jobs and allow a struggling business to continue operations for a few months or a couple of years. There’s always talk of changed business practices with news of money. But, as experience shows, it really is just talk.

Government handouts to established businesses allow owners and employees alike to avoid difficult, but necessary decisions. In the end, one can only avoid tough decisions for so long. 

The recent deal between the provincial government and Kruger adds another dimension to this history. A 2014 agreement gave the company a $110-million loan and a commitment from the provincial government to buy the Deer Lake power plant for a set price ($200 million in 2019), should Kruger close the mill. The deal was barely a year old before the company was back looking for more financial help from taxpayers.

Now they have it. Based on comments in the House of Assembly, it now appears that government does not expect repayment of the $110 million. If Kruger shuts down the Corner Brook mill, government will buy the Deer Lake plant for the set price of $150 million this year, $175 million in 2018, and $200 million in 2019, as agreed in 2014. 

But here’s the new twist: anything in the purchase price beyond the $110 million that was a “loan” will cover the unfunded liability in the company pension plan.

Once the Maritime Link is commissioned, the amount taxpayers could pay will go up. Under the agreement, government will pay $200 million or the assessed value of the power plant, whichever is greater. The new valuation is supposed to reflect the potential exports of electricity from Deer Lake to markets on the mainland.

This latest handout to Kruger makes no plan for long-term survival. It comes with a perverse incentive that would make Kruger better off to close the mill in 2019 or after the Maritime Link is set up, whichever comes first. Environmental liabilities for the mill and worker pensions would be covered by the province and, if the valuation on the Deer Lake power plant exceeds $200 million, Kruger can walk away with more provincial cash to cover other outstanding debts. And yet its mill continues to have financial problems, despite all the taxpayer money the company has been able to get.

Government officials are notoriously bad at playing banker or venture capitalist. As Newfoundland and Labrador's history sadly shows, generation after generation is very bad at it.

Residents should stop encouraging them to think that they need to look after everyone.

Instead of trying to pick economic winners, governments should create a clear set of business rules and regulations and implement a competitive tax system. These policies would allow entrepreneurs and workers to create profitable businesses that are sustainable without taxpayer subsidy. Companies that want to use natural resources should pay competitive rents to the resource owners — that is, to taxpayers — for the right to develop those resources. 

This latest deal with Kruger may turn out differently from those that preceded it, but the odds would make that a pretty wild dream. The history of economic development in Newfoundland and Labrador shows that governments have no business in business.

 

Ed Hollett, senior fellow
Atlantic Institute for Market Studies

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