MONTREAL, April 12 - 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
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