MONTREAL, April 12 /CNW Telbec/ - Subsidies for Alcan aluminum smelters
announced by the Quebec government are a loss to Quebec society, and this
error must not be repeated in negotiations with Alcoa or in renegotiating
shared-risk contracts with other major electricity consumers, says an Economic
Note published today by the Montreal Economic Institute.
Gérard Bélanger and Jean-Thomas Bernard, professors of economics at Laval
University, state in this Note that "recent agreements in the aluminum sector
and others under preparation fail to take account of basic economic logic and
will harm Quebec's economic development for decades to come unless the
government follows a different path."
Orders in council
In February, two orders in council from the Quebec government gave
official stature to a hefty subsidy to Alcan as part of an aluminum smelter
project in the Saguenay-Lac-Saint-Jean region. To create 740 jobs, the
government is giving up $2.7 billion in revenues in exchange for a $2-billion
investment by Alcan, the two researchers estimate.
In addition, another major player, Alcoa, has knocked and is still
knocking at the government's door to obtain assistance in renovation and
expansion projects at its Deschambault and Baie-Comeau plants.
Too high a cost to Quebec society
The total cost to the government of the subsidy to Alcan equals nearly
$300,000 per job each year for 35 years. The true cost of the electricity
provided under this deal can be measured by its opportunity cost to the Quebec
government. Opportunity cost is a term used by economists to denote the most
advantageous alternative solution. What it means in this instance is the
export price that could be obtained by selling our electricity on the market
to our U.S. neighbours.
The reason used most often to justify government assistance is economic
spin-offs. The justifications provided in this case by ministers Raymond
Bachand and Pierre Corbeil come from calculations filled with double counting
and neglectful of alternatives. An analysis of other solutions that could be
considered shows that the government is giving up at least $2.7 billion. This
amount could have been used, for instance, to improve Quebec's highway
network, an investment that would generate far more in direct and indirect
economic spin-offs than the $2 billion pledged by Alcan.
All spending generates economic spin-offs, regardless of who is doing the
investing. The government could apply a higher Hydro-Québec dividend to
reducing the tax burden now and in the future, enabling many private investors
to create jobs worth just as much as those promised by subsidized companies.
It is thus false to state that "exported electricity does not create jobs in
Quebec," as argued by the Aluminum Association of Canada.
The Quebec government is counting on various spin-offs to fill the
sizable gap between the electricity price paid by Alcan and the export-based
opportunity cost. The problem is that government negotiators can never fill
this gap created by the advantages yielded to aluminum producers: if the
government demanded too much in spin-offs, these producers would go where
electricity prices and other conditions are more favourable than in Quebec, as
in Australia, Iceland, Qatar or South Africa.
Those countries are low-cost electricity producers but must convert spare
power into exportable products such as aluminum because of their distance from
electricity export markets. This is not the case in Quebec, which is
surrounded by areas where electricity prices are two to three times higher.
Quebec has an advantage of location compared to those countries. It is far
more lucrative to export electricity directly through interconnections than
indirectly as aluminum ingots.
Gaining from a new context
Two major changes have occurred in the last few years. First is the rise
in the cost of building dams on distant rivers. The era of low-cost
hydroelectric development is coming to an end in Quebec. The other change is
the opening of the U.S. wholesale electricity market in 1998. Hydro-Québec now
can sell electricity directly at the market price.
If we consider the cost of developing new electricity sources in Quebec
as well as the export market, the low-price sale of electricity to aluminum
producers constitutes a loss to Quebec society. The Quebec government's
industrial policy does not yet reflect this new reality.
The Economic Note titled Subsidies for aluminum producers: benefits that
don't add up, was prepared by Gérard Bélanger and Jean-Thomas Bernard,
professors in the department of economics at Laval University.
The Note is available at www.iedm.org.
The Montreal Economic Institute is an independent, non-partisan,
non-profit body that takes part in public policy debate in Quebec and across
Canada, offering wealth creation solutions on matters of taxation, regulation,
and reform of health and education systems. Its publications since 2000 have
included the Report Card on Quebec's Secondary Schools. In 2004 it won a
Templeton Freedom Award for Institute Excellence for the quality of its
management and public relations.
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For further information: and interview requests: André Valiquette,
Director of Communications, Montreal Economic Institute, (514) 273-0969, Cell:
(514) 574-0969, email@example.com