Hide the boondoggle
If you’re not skeptical about the true state of provincial finances, you should be.
The official balance sheets of provinces across the country mask billions of dollars in debt related to a series of megaproject follies being pursued by provincial governments and governmentowned power utilities. While their debt doesn’t officially appear on provincial balance sheets, taxpayers will be left footing the bill when the electricity rates needed to pay them off become so economically crippling and politically unpalatable that they will require a bailout.
A chorus of auditors general and ratings agencies have questioned this trend of masking liabilities, but have seen their warnings ignored by political leaders determined to bury the risk of pet megaprojects.
The most recent example of mixing electricity liabilities with taxpayer liabilities comes in Ontario. The province recently passed the Fair Hydro Act, which will see it issue as much as $26.2 billion in debt over the next decade to finance temporary rebates to electricity customers — all to mask the rate increases caused by a decade- long ex- travaganza of clean- energy spending.
The province will hide that debt from its own balance sheet through a series of accounting and regulatory manoeuvres. In a recent report, Ontario’s auditor general highlighted that the province’s main motivation in moving debt related to the Fair Hydro Act off its balance sheet was to “avoid” any increase in its net debt that would see it post another deficit budget. The AG said the Fair Hydro Act allows the province to “make their own accounting rules” that “obfuscate the impact of their financial decisions.” Ultimately, she concluded, the legislation will make Ontario’s financial statements “unreliable.”
At the same time, the provincially owned power utility, Ontario Power Generation (OPG), is undertaking a $ 12.8- billion refurbishment of the Darlington nuclear plant, a megaproject so risky that the utility couldn’t do it without the backing of taxpayers. OPG’s own expert admitted the company would “struggle” to issue debt to finance projects like the nuclear refurbishment if it didn’t have the implicit backing of the province’s taxpayers. While that debt isn’t on the province’s balance sheet, any bailout related to it would likely end up there.
In B. C., it’s more of the same, as one ratings agency warned that deteriorating finances at the provincially owned utility, BC Hydro, could result in a tax-payer-financed bailout, which would ultimately wind up on the province’s balance sheet. That risk will only increase in the coming years. The public utility’s spending binge, most notably on the near $ 9- billion ( and counting) Site C megaproject, will see its debt increase to $ 20 billion, up from $8 billion in 2008.
Worse still, a chunk of BC Hydro’s debt has been issued solely to pay provincially mandated dividends to the tune of billions of dollars. While the province tells the public it’s balancing its books, it’s doing so partly by loading its utility up with debt.
BC Hydro is also hiding expenses by attributing billions of dollars to “deferral” accounts, which help juice its earnings and dividends to the province, a practice B.C.’s auditor general called “unsustainable.”
In Newfoundland and Labrador, which has the lowest debt rating in Canada, the province continues to consider its “equity” in the $12.7 billion Muskrat Falls dam — up from the original estimate of $6.6 billion — as an asset. Unfortunately, that equity investment was made largely using borrowed money. Any write- down in the value of the asset will be a loss for taxpayers. Since the utility’s own CEO has repeatedly called the project a boondoggle, a writedown would appear to be a near certainty.
The province’s auditor general also recently warned that any “rate mitigation” enacted by the province to offset the ballooning costs of the Muskrat Falls — in effect transferring the cost from electricity customers to taxpayers — will have to “consider the impact” that such a move will have on the province’s balance sheet. In short, the province’s balance sheet — already in a perilous state — will be the backstop for a megaproject gone wrong, reflecting any bailout needed to mitigate its impact on electricity customers.
While the risk to electricity customers of multi- billion megaprojects has been clear for some time — a number of public utilities have been warning of double or tripledigit rate increases — the risk to provincial balance sheets is now coming into focus. Public utilities across Canada went all in on megaprojects, all the while being aided and abetted by provincial governments. Now that the risk of those projects is getting larger and larger, provincial balance sheets will take the next hit.