NORTH-
EAST
MEGA-
BLUNDER

Editor’s Note:

The following article is by Bob Allen,
of the UBC Dept. of Economics. He is a
member of the Pacific Group and the
Economic Policy Institute.

With the official opening of the northeast
coal project, Premier Bennett has been
cheering its success and — much more
worrying — promising us even bigger
projects in the future. Before we join in the
applause, we ought to look at the facts. They
show northeast coal to be a disaster that
should not be repeated.

Why Northeast Coal Is A Mistake

There are three tests to use in judging a
project like northeast coal — job creation,
the contribution to economic development,
and the distribution of its benefits. North-
east coal fails all three tests.

1. Job Creation A

Premier Bennett defends projects like
northeast coal on the grounds that they
create jobs. Of course they do, but they doit
inefficiently. With the cost of northeast coal
now put at $3 billion, each permanent job
created costs $1.5 million. Invest that
money at 10% and the annual yield
($150,000) is many times the income of the
people employed on the project. Indeed, why
should they work when the investment is
enough to give them lifetime annual pen-
sions of $150,000? If B.C. wanted to spend $3
billion to create employment, it could have
created a lot more jobs than northeast coal
has done.

2. Contribution to Economic
Development e
A project like northeast coal contributes to
economic growth by providing a more
productive outlet for capital and labour than
they would otherwise have. As capital and

Jabour are drawn into the project, they are

withdrawn from other uses and income
. outside the project falls. The true cost of

the project is that decline in income. In
compensation, the project generates addi-
tional income. If the income generated by
the project exceeds its cost, the project raises
the community’s total income and thereby
causes economic growth.
In fact, northeast coal will lower
provincial income, not raise it. To see
how, we can examine the provincial govern-
ment’s 1982 cost-benefit study. This report
concludes that northeast coal will increase
provincial income, but that finding requires
such wildly optimistic assumptions that it
cannot be accepted.

The income generated by the northeast
coal project is the value of its coal exports,
all of which go to Japan to make steel. To
evaluate the project, it is necessary to
forecast the price and quantity of exports
each year to 2004. Both price and quantity
forecasts appear seriously overstated. This
is important since a decline in the present
value of coal exports by 14% or more implies
that the project will lower provincial
income, not increase it.

The cost-benefit study assumes that the
quantity of coal exported will always equal
the quantity the Japanese have contracted
to buy. However, the Japanese pay no

ity for taking less, and they rarely
accept the full contracted quantities.

‘Between 1970 and 1982, shipments of
coking coal from Australia and Canada
to Japan averaged only 77% of con-

heast coal mines ship 77% of the
x ed output over the next twenty
the cost of mining and shipping the

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coal will be greater than its market value
even if the market price rises at the rate
assumed in the cost-benefit study. In that
case, the northeast coal project will lower
provincial income.

Moreover, it is inconceivable that prices
will rise as fast as the cost-benefit study
assumes. It assumes that in 1984 the north-
east mines will realize $97-$100 per ton
shipped from Ridley Island. Today the
world price of coal is $69, and the Japanese
are seeking to renegotiate the B.C. price.
Their bargaining position is strong since
they are not required to take any coal at $97
and since they can buy all they need from
Australia at $69.

The Japanese did not become the biggest
steel producers in the Free World by paying
more for coal than they had to, so we can
expect the’B.C. price to fall below $70 per
ton. This situation will continue indefinitely
since there is no prospect of an increase in
Japanese steel production large enough to
absorb the potential output from mines in
Canada, Australia, South Africa and other
producing countries.

Given the depressed state of the
Pacific coal market, the question is not
whether northeast coal will be unprof-
itable but by how much. Whatever the
answer, the project will lower B.C.’s
income.

8. The Distribution of Costs

and Benefits

Whose income will fall? A price of $70 per
ton probably covers the operating costs of
mining and shipping the coal but leaves no
surplus to pay the interest charges on the
enormous investment made. The 1984 pro-
vincial budget, which transferred $470
million to the B.C. Railway to cover part of
its debt, is the first installment on the
necessary bailout.

That transfer also suggests whose income
will fall because of northeast coal. To the
degree that the transfer is financed by
raising taxes, then taxpayers will pay. To
the degree that the transfer is financed by
reducing social services, social assistance
payments, and educational services, then
those who receive those services will pay. In
either case, southeast B.C. workers will bear
an especially grievous burden; either paying
taxes as employed workers to help finance a
competitor to drive down wages, or receiv-
ing less by way of transfer payments to
assist them if they are laid off. These groups
can look forward to further sacrifices in the
future.

In contrast, suppose that the rosy fore-
casts of the cost-benefit study come to pass.
With the value of coal sales greater than the

cost, somebody’s income is raised by the
difference. Whose?

You might expect that it’s either the mine
owners or the workers and the cost-benefit
study shows that each realizes a bit more on
his or her capital or labour than would be
realized otherwise. Extraordinarily, how-
ever, the main beneficiary of northeast coal
is the federal government. Federal corporate
income tax receipts and operating profits
earned by the Canadian National Railway
in shipping coal from Prince George to
Prince Rupert absorb almost all the
benefits.

The bottom line on northeast coal is
that it is an investment project under-
taken by the provincial government to
generate extra income for the federal
government. Even under the excessively
optimistic assumptions of the province’s
own cost-benefit study, northeast coal will
generate very little extra income for resi-
dénts of British Columbia.

Under realistic assumptions, all pro-
vincial taxpayers and residents will
lose.

The Lesson of Northeast Coal

If northeast coal were a failure for its own
peculiar reasons, then it couldbe written off
as just another example of Social Credit’s
unbusinesslike management of the public
purse. But the reasons for the failure are
more fundamental, and for that-reason the
Premier’s promise of more such projects is
deeply troubling.

The Canadian Pacific Railway was the
original megaproject. It was enormously
successful in raising national income
because it opened up an economically viable
region. Governments have tried to replicate
it ever since. Megaprojects raised income as
long as they expanded settlement.

Now that the process of settlement is
complete, megaprojects will not generate
extraordinary returns and raise income.
Indeed, all recent provincial projects — the
Dease Lake extension of BC: Railway, the
Revelstoke Dam, ALRT, and northeast coal
— are economic disasters.

Megaprojects are shadows of the past, not
the way to a prosperous future. Indeed
projects like northeast coal don’t make us
rich. We can afford them only because we

are already rich.

Mr. Bennett, if you have more megaproj-
ects up your sleeve, please spare us.

Lumber Worker/Summer, 1984/5