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Saskatchewan’s Meadow Lake pulp mill was doomed from the beginning. The repercussions are still being felt, according to a new research paper.
It’s been decades since the government of Grant Devine (he was premier from 1982 to 1991) was in power in Saskatchewan. But traces of the Conservative premier’s economic decisions remain. The Meadow Lake mill is a good example.
The 1980s were full of economic turmoil in Saskatchewan, thanks in part to commodity prices collapsing, extreme weather conditions such as droughts and unforeseen technological changes. And then there was Meadow Lake.
The Frontier Centre for Public Policy has just published the third paper in its Balancing Elephants series, written by Gerard A. Lucyshyn. It examines the return on investment from the Meadow Lake pulp mill – or, more precisely, what the Saskatchewan government really lost on the project.
Lucyshyn writes that the data reported at the time, and information from defensive politicians, suggested the loss was worse than it really was.
In fact, the Saskatchewan government only lost about 20 per cent of what residents were led to believe: $259.1 million in investments, and $57.4 million in operational losses over 14 years. The rest was unpaid interest that was written off.
When elected in 1982, Devine and his government promised economic diversification through privatization. Privatization was intended to expand the economy while reducing risk to the government.
So a large capital investment was required for the Meadow Lake project.
It was the structure of this capital loan that doomed the project from the beginning.
In February 2018, the Saskatchewan government will implement tighter restrictions on payday loans for consumers, and rightfully so. High-risk borrowers will be protected from predatory financing arrangements.
Too bad similar rules don’t constrain government because, in the case of the Meadow Lake mill, the Saskatchewan government was the predatory lender.
Predatory lending imposes abusive or unfair loan terms on a borrower. These loans are often structured in a way that forces the borrower to continuously roll over their loans, in a vicious cycle of high interest rates and punitive fees. In Canada and the U.S., many jurisdictions have adopted anti-predatory lending laws. The intent is to limit interest rates and fees, protecting borrowers from a never-ending cycle of interest payments and fees.
Many people criticized the Devine government for the project. In fact, the project made sense at the time. International pulp prices were high and Saskatchewan’s gross domestic product was on the upswing.
However, shortly after the New Democratic government of Roy Romanow came into power in 1991, pulp prices plummeted. In addition, demand for pulp products was falling and domestic producers faced rising competition from low-cost suppliers in China and Indonesia (who operated under softer environmental and labour standards).
The Romanow government failed to adequately monitor and understand the commodity price and market fluctuations. Instead, it focused on protecting the jobs created by the Meadow Lake mill. As a result, the mill had no way to pay back the loans made by the government. As the payments failed to meet the terms, the principal grew. And these negative amortization lending practices employed by the province meant Meadow Lake’s debt grew. The interest eventually inflated to about three times the principal ($649.7 million) and that represents the largest loss on the books for the project.
In reality, the government should have monitored the overall economic situation much closer. It should have been aware of the ever-changing commodity prices and underlying factors that determine commodity prices.
World pulp prices collapsed as the new digital age emerged. And as the demand dropped, the supply of cheap pulp from Indonesia and China was on the rise.
At that point, the Saskatchewan government should have simply written off the interest owed and halted any further interest accrual.
A great deal of public money was invested and lost in the project. And that raises a critical question: Should governments be in the business of lending money or should they leave it the banks?
Alexandra Burnett is a junior research associate enrolled in the Frontier Centre for Public Policy Internship Program.
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