The dangerous charms of financial engineering in the Yukon – Yukon News


Films such as The Big Short during the global financial crisis gave financial engineering a bad name. Here in the Yukon, the territorial government had to write off $6.3 million when complex investments in asset-backed commercial paper turned toxic.

Today, the Yukon government has no excess cash to invest. Instead, it is taking on more debt: $235 million on all territorial government legal entities according to the 2021 public accounts.

As of March 31, 2021, the Yukon Development Corporation (SDC) had $100 million in bonds outstanding, plus $69 million in other debt. The Territorial Line of Credit account had been tapped to the tune of $33 million. The Yukon Hospital Corporation had $26 million in bank loans. Other smaller debts from Yukon University, Yukon Housing and other organizations round out the total.

We can expect greater numbers and more agencies to step into the act in the years to come.

The Yukon government is facing increasing financial pressures. The population is aging, which means higher health costs. The physical infrastructure is also aging in a costly way, as indicated by the colossal $160 million required for the new Teslin Bridge. Melting permafrost under highways and buildings as well as flood protection infrastructure will add to the bill.

Then there are the operating and maintenance costs of all the new facilities recently built or under development: Center of Hope Shelter, Housing First, High Country Supportive Housing, Health Center and Bilingual Wellness Centers, Mayo and Old Crow Wellness Centers, New Schoolhouse in Whistlebend, Robert Service Parks Building, Arts and Heritage Resource Center $29-40M+ Again.

In this situation, we can expect more agencies to design projects so that the government does not have to pay the entire capital cost up front.

That’s not necessarily a bad thing. Northwestel recently announced two groundbreaking agreements along these lines.

Last month, the telephone company announced that 13 First Nations in a consortium called Yukon First Nations Telco would purchase some of Northwestel’s fiber optic cables. After prepaying Northwestel, they will then receive lease payments from the telephone company for 20 years.

This is a purely financial agreement. Your web browsing will continue as it does today. Your bits and bytes won’t know they’re traveling on Indigenous-owned fiber.

It’s a win-win result. Northwestel now gets cash to invest in new businesses or to return to its shareholders. And First Nations get a nice, stable, low-risk cash flow on their investment.

A similar arrangement will take place with Northwestel’s new head office, which will be located on Quartz Road, opposite the old oil refinery. The Kwanlin Dün First Nation Development Corporation will own the building and lease it to Northwestel for a minimum of 20 years.

Again, Northwestel avoids a large up-front investment while the First Nation gets a long-term stream of rental revenue.

For the Yukon government, however, financial engineering involves certain risks.

The first is that it is taken to the cleaners by the big city suits who negotiate such deals for investors. A government official may only negotiate one such deal in an entire career, while the pros do it all the time. The juice is in the details, as they say, and the pros know the details.

It would be wise for the Yukon to have a territorial version of the Parliamentary Budget Officer. Independent of government and reporting directly to the legislature, this public analyst would comment on the fairness of proposed agreements.

It is better to have someone take care of this before the agreement is signed, rather than to see the federal auditor general make a depressing visit afterwards. This is what happened after the asset-backed commercial paper debacle.

The second risk is that large interest payments leave the territory if the lenders come from outside.

For example, the Yukon Housing Corporation pays chartered banks and CMHC interest rates ranging from 7.5% to 9.5%. You might notice that’s 7.5-9.5% more than what you were getting in your savings account before the recent spike in interest rates.

Another example is the Yukon Hospital Corporation, which pays one of the major banks 5.15% on a loan of $9.5 million and 5.23% on another loan of $8.3 million.

One option here is to create a Yukoners equity fund, where ordinary Yukoners can put their money and get a share of the stock in future facilities of Yukon Energy, Yukon Housing or the City of Whitehorse.

The system we have right now is that ordinary Yukoners buy guaranteed investment certificates from a bank in Toronto at a low rate, and then the Yukon government borrows the money at a much higher rate. Which is great for the banks, but a missed opportunity for the Yukon.

But before we do too much tax sleight of hand, we really should hire this Legislative Budget Officer. Otherwise, sooner or later, the Yukon Film Society will host a The Big Short: Yukon Edition workshop.

Keith Halliday is a Yukon economist, author of Yukon Aurora adventure novels for young people and co-host of the Klondike Gold Rush History podcast. He is the winner of the Ma Murray Prize for best columnist.



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