Self-Sufficiency: Boon or Boondoggle

Our political leaders are no different from us except for the size of their egos and the cost of their dreams. Trudeau had his “Just Society”, Lyndon Johnson’s “war on poverty”, Mike Harris his “Common sense revolution” and I’m sure that you could mention many others over the years. And you know who gets the bill. It is sometimes difficult to determine whether their vision is really intended to succeed or if it is just a political tool to divert attention from other problems that beset a government. Is it just smoke and mirrors?

The Liberal government of Shawn Graham has begun a task force on self-sufficiency, which seems to be a grand and noble enterprise. After all, who wouldn’t want to stand up on our own two feet and not receive handouts from Ontario and Alberta. The expected subsidy in 2006/07 is $1.45 billion or roughly $1900 per person in New Brunswick. This is about 22% of the NB’s annual operating budget.

To date the task force has issued three reports and received submissions from a number of individuals and groups. The pre-packaged reports seem to have it all figured out with some of the interesting items being suggested: raising the population of the province by 100,000 people, higher paying jobs, investing an extra $1 billion in infrastructure (mostly roads) and helping targeted businesses, and many other industry friendly items. What is of some concern is the lack of documentation supporting the recommendations and the lack of economists involved in the review process. After all, it is suggested that we spend $1 billion and I haven’t seen a business case in sight. Can we expect that this approach will have a realistic chance of success?

First we could take a look at some of the principal recommendations and pass them through a logic test. The report states that we need to grow our population by 100,000 people. At first glance, this would seem to make sense – more workers to cover the fixed costs of government. However, Nova Scotia has 185,000 more and Manitoba has 428,000 more people than New Brunswick and each of those provinces receives $1450 per person equalization. In fact, Quebec at 10 times the population of NB receives $725 dollars per capita annually. So it would seem that a small increase in population is not the determining factor. The report states that wages have to go up to attract people back to New Brunswick. Typically, jobs in this region have been rare and out migration has been a matter of necessity. Of the hundreds of thousands of former easterners that have gone west over the years, a large number would love to move back but no opportunities presently exist. When the jobs become available here, they will come.

The report indicates that we must spend hundreds of millions of dollars on highways. Unless I am mistaken, we have been spending, on average, $300 million dollars per year on capital highway improvements since the McKenna years. Where is the dramatic economic improvement from that investment? Are we to increase those expenditures? What is the benefit of going from a two-lane highway to a four-lane highway? Traffic is still limited to 100 km/h and we don’t have the traffic volumes of larger provinces.

Call me simple, but I see a road as an expense – having an incredibly high cost to build, snow clearing expense each year and repaving every ten years. The only tangible payback is the gas tax and that remains fairly constant no matter how many new roads we build.

What will be the economic impact of spending $1 billion dollars as proposed? (allocation of $500 million on new roads and $500 million on aid to new and expanding enterprises). Government investments in business startups and expansions can lever private investment greater than the original capital investment of $500 million perhaps to a tune of five times or $2.5 billion. Road construction is a one-time expenditure that doesn’t leverage private investment. The total impact, ignoring other economic multipliers is approximately $3 billion.

To remove the necessity for equalization, government revenue has to rise higher than the amount of equalization. However, to increase government revenue to remove the $1.45 billion annual equalization subsidy at an income tax rate of 20% would require an increase in personal income of $7.25 billion dollars. This is the equivalent of 100,000 new jobs at $75,000 annually. The New Brunswick employment levels for the past five years show a small increase of 1670 people. The Alberta statistics show an increase of 225,000 jobs over the same period.

The annual capital investment in Alberta rose from $29 billion to $58 billion. In the same period New Brunswick rose from $2.5 to $3.6 billion. Given that the population of Alberta is four times higher than NB, one can see the incredible difference in investment, above that which population would normally create. 55% of the $58 billion is in the mining, oil and gas sector and that creates large numbers of jobs and draws employees from elsewhere in Canada. Looking at the investment and the jobs created, it looks like approximately $1Million per job. The proposed Irving refinery is costed at $5 billion and will produce 1000 full time jobs. That is $5 million per job created.

So if we invest the equivalent of $3 billion (with private investment added in), then the jobs created would be 3000 or perhaps 5000 if we are optimistic. This is a long way from the 100,000 that would be necessary to achieve the self-sufficiency that the task force has suggested is possible.

There are some good ideas in the reports of the task force, especially those items related to the availability of credit for expansion and new business. However, the implementation of the consultation process has been flawed, hurried and basically just going through the motions. The choices made by this government preclude other paths that would actually work and lead to true self-sufficiency. My suggestions for success will follow in a future column.

The future of Saint John Energy

A ‘muni’ is an industry acronym for a municipal electric distribution company. There are three in New Brunswick. (Saint John, Edmundston, Perth Andover) For 325,000 of New Brunswick’s power consumers there is a review process. The Energy and Utilities Board (EUB) asks questions about rates, policies and procedures. Finances are probed and judgements made. We have considerable reason to doubt its efficacy due to political meddling in the past with its decisions. The minister of Energy Jack Keir tells us that the government will not veto the new board with respect to the upcoming rate increase and one would hope that the board is empowered to investigate all aspects of the power utility business. NB Power presently has a debt of close to 4 billion dollars.

The other 41,000 utility customers in Saint John, Edmundston, and Perth Andover do not have that review process. We have to assume that the part time board members of these utilities have the expertise and the time to set direction for management and ask the right questions. This is unlikely to be the case and they are only fulfilling a part of the necessary tasks. We could ask the question in another way. Why is it important for the EUB to regulate 9 customers when the 10th is not scrutinized?

Certainly, excessive regulatory costs could be a concern but there should be a way to hold hearings with these distribution utilities at a reasonable cost.

The very fact that we have more than one electric distribution utility in the province raises an interesting question. Since it costs less to distribute power in an urban center, Saint John with its own utility, can sell power for roughly 10% less than NB Power, even though the power is generated at the same plants. This is because of the compact nature of cities and the reduced investment in poles and transformers per customer. Should the citizens of Saint John or Edmundston buy kilowatt-hours cheaper than the average New Brunswicker? The question could be rephrased. Why should the residents of Fredericton, Quispamsis or Moncton agree to subsidize power costs to rural areas of New Brunswick when the citizens of Saint John do not? Should they have their own electric utility as Bill Belliveau of Moncton has suggested?

In the past year the City of Saint John has had financial stress for several reasons and has been claiming that ownership of Saint John Energy is vested with the City and not the ratepayers of the utility. The purpose of the sudden interest in SJE is not controlling oil wells or to bring democracy to the workers at the utility. It is more likely that the planners at the City have designs to liberate some of the cash flow from the utility to improve the financial position of the city. This seems to be a magician’s trick to put $250 onto your annual utility bill and slide it into another pocket. We have to pay for the decisions of City Hall in some way.

According to its annual report, Saint John Energy has no long-term debt. If the ownership issue is settled in favour of the City, then it could have a sale price ranging from a low of $70 million based on synergies to a high of $180M if the rates were synchronized with those of NB Power. The possible purchasers would be companies like Emera, Fortis or perhaps NB Power, who would derive benefits from a larger direct customer base in the south of the province. Or it is possible that an annual dividend could be paid to the City by the utility. A regulated utility would require EUB approval to pay the City. What seems fairly certain is that a change from the present status would mean higher rates for electricity.

There is another third alternative to the conservative status quo or the “sell Dad’s company and party time” option. The use of Saint John Energy as a developer of green power such as wind and small hydro could be a start towards sustainable development. Combined heat and Power (CHP) projects for developments in the city core would provide high efficiency use of fuel. The redevelopment of Musquash Hydro and construction of a water treatment plant could be accomplished by the utility without even working up a sweat. Some municipal utilities are providing lower cost citywide wireless Internet or fiber to the home to enhance the city lifestyle and productivity. Attracting people to live in the City requires benefits that overcome the higher taxes. All this and much more is possible with the necessary vision, leadership and cooperation between the City, the Province and Saint John Energy.

The University of New Brunswick is to be congratulated for their “Lets Talk Saint John” initiative. This is a grass roots collaborative project (with members of UNBSJ and the broader community) that encourages open and honest discussion of current and future issues that affect the region of Saint John. This issue could be raised at a future public meeting. Further information on “Lets Talk Saint John” can be found at http://letstalksj.ci-fi.net/ltsj/index.cgi

Other venues for discussion could be an EUB hearing or Saint John Energy holding an annual meeting with the ratepayers (the owner of SJE) or perhaps a town-hall type meeting organized by the city (the owner of SJE). After all, a municipal election is scheduled for 2008 and this is an issue of considerable importance to the electorate. The beginning of rational debate begins with a transparent and open process that honestly discusses the facts and likely outcomes of each alternative. It is not a quick process and it requires discipline and patience on the part of all concerned.