SAINT JOHN -LNG PLANT SOUND ECONOMICS
Saint John City Council did a remarkable thing this past week and month when they agreed to a tax cap on a major investment in energy industry development in their community by the Irving's for the LNG Terminal complex.
It was a difficult decision for them and has sparked debate in all of New Brunswick, because like a viral infection, all New Brunswickers will share the lost tax recovery from the plant, as their Provincial contribution is by definition capped as well. In New Brunswick, all tax revenues flow into Fredericton and are re-distributed by formula.
As a result any tax cap deal in any municipalities that avoids revenues going to Fredericton means that all other municipalities and taxpayers will feel the hidden impact of this deal. It is still a good deal for Saint John and for all New Brunswickers.
Since this original post was made I have received several emails commenting on the actual tax structure of New Brunswick, suggesting that only the City of Saint John was forgoing the tax and that revenue share for the Province would still collected. Here a succinct explanation from one of those helpful emails.
A reader writes: "In the case of Saint John, just one thing on your write-up regarding taxes - Saint John is the one that will be foregoing taxes, not Fredericton. The municipal non-residential tax rate is 1.5 times the municipal residential rate but the municipality only gets the 1 of the 1.5. With their cap of $500,000 they are effectively giving up all SJ tax as presumably they will still have to remit to Fredericton.
So for SJ itself I would guess it will represent zero real tax revenue to the City. But and this is the most important, they will be giving up tax revenue that does not exist and will only exist if the plant goes ahead so they are really giving up nothing.
The cost is in the infrastructure maintenance - if they have a big real annual cost in this regard then the plant actually will cost the city money. But the little I have seen, it will be minimal municipal infra as the terminal will be near existing Irving installations."
Then later in the week the LNG Tax Cap took another turn. Premier Lord, in response to the the Liberal Opposition Critic's Question in Question Period, revealed that certain infrastructure projects fall under a subset of the Province's Tax Act and indeed the Province would also be in effect enabling a tax free holiday from property assessment taxes.
Despite this new information, I remain convinced that this is still a good deal for all New Brunswickers who share a tax burden with industry in providing essential core government services.
The insight to economic investment versus tax incentive and resulting tax revenue generation over 25 life cycle revenues from associated and related tax levies that I have comes from the ongoing participation in the economic development boards and groups of Moncton . There, I often see the demands placed by all industry looking to expand to even consider New Brunswick, or consider any community in New Brunswick, or Atlantic Canada, for that matter.
What business knows is that their capital risk is just part of a giant financial puzzle that ends up in front of the capital equity lenders as the terms of the deal. Whether you are an Irving with yet another major corporate capital project for industrial expansion employing hundreds, or a single residential homeowner going for a new garage addition to the family home, the lender's financial rules of debt-to-equity-to-available-cash flow are the same.
What is the level of available cash for debt servicing over the life of the loan?
This applies to the Irving family whose idea of a good time is yet another loan for yet another performing asset that before it performs, represents a huge risk of bringing their remarkable track record in economic expansion and business extension to a crashing halt at worst and stalling their wide range of business growth opportunities as a best outcome.
What the LNG Terminal deal is for New Brunswickers is a sharing of the risk in making New Brunswick a continued player in the high stakes business of world energy markets. When Saint John accepts the huge benefits of Point Lepreau ( $ 70 Million payroll, 700 employees generating income tax, HST purchases and property taxes to City and Province in the amount of 38% of the available taxable income returned to government.), and the Irving Refinery with similar numbers, there is a requirement to be a financial partner.
That is how the new world order of economic development is being played. See the Dell Computer deal below for a lesson in economic development.
There is according to the recent report out of Maine, regarding a similar proposal voted down this week by taxpayers there, only room for 1 or possibly 2 LNG Terminals on the Northeast coastline. The Irving's and I would argue the New Brunswick taxpayer has a lot at stake in maintaining the market share of oil and gas development that is available to us, since we have no claim to offshore natural gas revenues as Nova Scotia and Newfoundland just got from the Feds in the recent Prime Minister Martin deal.
New Brunswick is an economic orphan in the richest economic development stakes in the world.
I will return to this topic of the role of tax deferral in economic development projects another day, because there is a need for some basic economic understanding of this concept of pay-equity-for-economic diversification. We, in Atlantic Canada are increasingly isolated from the economic strength of Western and Central Canada's natural resources and manufacturing. We, in the four Atlantic Provinces, are going to have to Bud our own future economy as national government retreats from nation building.
Here's an interesting piece of contrasting information. During the same week in November that Mols0n's(now Molson-Coors), was in Moncton, announcing the upcoming brewery project and being subject to a debate over tax agreements and financial incentives to bring industry to an area like Moncton, there was a similar announcement made in South Carolina involving an economic developer's dream development of a computer factory making PCs for Dell, the World largest PC marketer. Net jobs created 600 plus, huge economic spin-offs for the next 20-30 year life cycle of the plant.
In economic development terms, life cannot get sweeter than that Dell development. Now read the economic terms. If Moncton had wanted this deal for New Brunswick, this is what it would have cost to play, and then go a few millions better.
This published news report below calculates and reveals what it cost State and local community governments to gain the go ahead investment from Dell, with plants in Mexico and Southeast Asia where labor costs are a fraction of the US costs. As you read this, think about the Irving project in a new light. They agreed to cap future revenues with no direct investment of public funds.
The Irving's still had to sit in front of a banker somewhere and make the same arguments that you and I make for a new house or car.
To the Banker's questions, the answer is "here's how I can afford to service this $25 million dollar loan over x years".
In Irving's case, the cap on tax flows directly and promptly and is probably pledged as part of the financing package, to the debt service provider over the 25 year life cycle of the LNG plant and port. In financial speak, an avoided cash flow drain from taxation, means that the debt granter can either be paid out quicker, have avoided tax payments pledged as a bonus payment to sweeten the deal for both sides with less interest paid, but paid more quickly to bring the deal's ROI to a more attractive level for whomever is going to provide the long term equity financing.
Think of it as a home owner's mortgage on steroids where you agree to pay weekly mortgage payments and in return get a lower interest rate and a shorter payment term. Result you pay less interest and the risk on the load is reduced for the lender.
In a nutshell this is what the City Council in Saint John agreed to in theory, without knowing the terms of the actual deal. Somewhere in the fine print is a New York merchant bank earning its fees.
Of course we could do as the coastal community in Perry, Maine , a hundred miles south of Saint John, has done and ignore the benefit and sit on our tax duffs while investment flows to more willing communities. In this case Saint John. Hats off to Saint John Common Council.
Excerpt from the AP coverage.
SAINT JOHN, New Brunswick — A day after residents in the small Maine town of Perry turned down plans for a liquefied natural gas terminal, the city of Saint John voted to stand by its earlier approval of tax breaks for an LNG terminal in New Brunswick.
Saint John City Council voted Tuesday ( March 29, 2005 ) not to rescind a 25-year tax concession for an Irving Oil-Repsol liquefied natural gas plant. Property taxes for the terminal will be capped at a $500,000 (Canadian) a year for 25 years.
Here's the Dell deal in contrast . Keep in mind that in the US, State income tax on company's is the main source of revenues for the State and do not have tax sharing strategies as they do here in Canada.
DELL TALKS DIFFICULT FROM START
Byline: RICHARD M. BARRON Staff writer
RALEIGH -- From the beginning, Dell drove a hard bargain.
The computer giant had a simple wish list in its negotiations with North Carolina: Free land, free building, no taxes. Period.
Negotiations were arduous. At several points, North Carolina felt it had lost the chance to land the company's new manufacturing plant.
When it began talking with North Carolina in 2003 about building an operation here, Dell's No. 1 goal was to be relieved of any state income tax. After all, state commerce secretary Jim Fain said Tuesday, Dell's home state of Texas has no corporate income tax.
Dell talked tough with Fain and never wavered in its demands. It was never a case of upping the ante.
"They set the ante high at the beginning," Fain said.
Fain spoke with reporters after releasing nearly 4,000 pages of memos, e-mails, meeting notes and other documents prepared during the yearlong process of first courting, then landing Dell's major computer manufacturing plant for Forsyth County. Dell announced in December that it will build a $100 million factory in Winston-Salem and hire about 1,500 workers.
North Carolina offered a package of incentives worth up to $242 million if Dell fulfills all its plans. The package includes income tax credits and grants.
The documents released Tuesday paint a picture of Dell as firm and demanding. They also illuminate the detail work that goes into a massive recruitment effort, from reserving meeting rooms at the Grandover Resort to offering certain perks for local Dell executives.
Based on the discussions portrayed in those notes, Dell was never a sure thing for North Carolina.
Dell first contacted state officials in late 2003. Its goal then was to build a call center for customer support. But by spring 2004, when management had researched its options, Dell clearly wanted to build a factory.
In March, Dell officials made a trip to the Piedmont Triad to discuss sites and hear proposals from state and local economic development officials. At that point, after Dell did some economic analysis of the state, it seemed clear that the Piedmont Triad was its primary focus in North Carolina. Dell was looking at other states, but it never disclosed which it was considering, Fain said Tuesday.
By late spring and early summer, negotiations got sticky. Dell dug in its heels. Around June 30, Fain made a note suggesting Dell wasn't happy with the state's offer to make it pay only 50 percent of its income tax. "What are impediments to getting to 0 (percent)," Fain wrote.
About a week later, Kip Thompson, who was managing the process for Dell, expressed his displeasure that Dell was being named in local newspaper reports as the company considering an operation in the Triad.
He demanded that any company visit be kept "below radar."
Further, Fain quoted Thompson as saying he was "not blaming you at any level about publicity. But it makes me more hesitant."
Dan Gerlach, Gov. Mike Easley's senior policy adviser for fiscal affairs, said at Tuesday's news conference that the publicity had another impact: Other states began overtures to Dell that could have scuttled North Carolina's chances.
He said the opportunity for the state "was a 60-yard field goal in the first place. They never moved the goalpost back. But there were a lot of other strong legs warming up out there."
In the June 30 notes, Thompson tried to play on Faina's loyalty to the state: "If a state like North Carolina can't get after this, I'm worried for our country. There's a certain amount of patriotism here."
After another offer from North Carolina, Fain quotes Thompson in his notes as saying on July 9, "I'm personally disappointed. I was shocked as we ran the numbers. Unless I can get that income tax resolved, it's best that we move on."
State officials worked hard to come up with an offer Dell would accept, and by the fall, talks were rolling again. In November, the state passed its massive incentives package.
Then it came down to communities in the Piedmont Triad to approve their local incentives. From the beginning, Forsyth County officials expressed confidence that Dell would be theirs. And based on their nearly $30 million incentive package, Dell chose a site in Winston-Salem.
But Gerlach says that behind the scenes, Forsyth officials were anything but certain: "They spent no small amount of energy exhorting us at the state level to be sure we did our part."
And now, according to Fain's notes, Forsyth County may be planning an even bigger welcome for Dell executives.
One undated note apparently written after Forsyth approved its incentive package says that Forsyth will seek restaurant meal discounts for Dell's "transition" executives in the county, as well as free dry cleaning, free gas, "free cars, free tickets and golf, concierge service."
Since this post was first published I received a copy of links re-enforcing the contention that economic development projects involving private risk capital is demanding a hefty tax incentive program to locate in any one area. Here are a couple more to follow up on this theme.
The first article reveals a Michigan state initiative to retain their auto industry in that State and the combination of reading the two information links establishes that what New Brunswick and Saint John taxpayers are giving up is precious little when compared to how the game in played in the US.
The second link is new tax incentive legislation coming out of the State of Georgia as this southern State goes after industry with a full court press. In Georgia, the Legislature is grappling with the idea of keeping terms of economic development negotiations a State secret.
