NOVA SCOTIA GOVERNMENT AIDS PULP AND PAPER COMPANY ON EVE OF

UNCLAS HALIFAX 000090 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EAGR ELAB PGOV CA SUBJECT: NOVA SCOTIA GOVERNMENT AIDS PULP AND PAPER COMPANY ON EVE OF ELECTION CALL REF: OTTAWA 0172 SENSITIVE BUT UNCLASSIFIED -- PROTECT ACCORDINGLY ¶1. (SBU) SUMMARY: Conservative Premier Rodney MacDonald of Nova Scotia is calculating that his government's C$65 million offer of assistance to an ailing paper exporter to the United States will pass the subsidy test. However, this cash infusion could be only the first step in providing additional aid to any large industry in the province, one of the expected planks in the Premier's upcoming election platform. END SUMMARY ¶2. (U) The government of Nova Scotia may have raised some eyebrows with its announcement on May 3 that it would offer C$65 million (US$ 58 million) to a troubled paper mill in the province's economically depressed Cape Breton region. Stora Enso, the giant Swedish-Finnish paper producer, owns and operates the mill in Port Hawkesbury, part of its North American network of plants. The Port Hawkesbury operation produces an estimated C$50 million of newsprint and catalogue paper for export to the U.S. market and has supported 650 direct and approximately 2,400 spin-off jobs since it began operation in ¶1961. However, like other pulp and paper mills in North America, Stora has been hard-hit by increasing operating costs and heightened global competition (reftel). ¶3. (U) In 2005, company officials warned that the mill's competitive position had eroded to the point that unless the province stepped in to help the operation, Stora would have to consider closing the plant permanently. The plant is currently idle, the result of a lockout of employees which began in January after the union rejected the company's final contract offer, which featured some hefty concessions by the workers. The shutdown of the mill has already had a significant impact on the southern Cape Breton economy, leading residents and local politicians to mount a high-pressure campaign for the MacDonald government to respond favorably to Stora's demands. ¶4. (SBU) For Nova Scotia Premier Rodney MacDonald, who is widely predicted to call an election within days, there seemed to be little political choice but to help the ailing mill. The deal as announced on May 3 provides Stora with C$65 million in C$10 million increments payable after each 12 months of full production, with a C$5million "bonus" at the end. It also requires Stora to work out a new contract with the workforce to get the plant up and running. In return for the cash, Stora will release the province from all contractual obligations to provide access to provincially owned land, including a commitment to provide 200,000 acres of forest by 2013. Economic analysts had warned the government previously to be cautious in how it structured any assistance to Stora to ward off subsidy allegations, and it appears the government's reasoning is that the cash for land swap takes care of that. However, there could be more aid to come and more subsidy tests down the road. Analysts see Stora asking for even more from the government and they predict similar moves by Stora's competitors and other large industries which are already lining up for taxpayer assistance. ¶5. (SBU) COMMENT: Given the current political climate in Nova Scotia and the expected election call, it is not too difficult to see why the Premier took the plunge and came up with the deal for Stora. Port Hawkesbury is near his home district and furthermore, his Conservative party has always relied heavily on the rural vote throughout the province. Given those circumstances, it will be interesting to see just how much emphasis there will be on assistance to Stora and other industries in the province when the Premier unveils his budget next week. After all, that document is considered to be the springboard for the Premier's election call so there should be lots of initiatives meant to please interest groups of all stripes. END COMMENT HILL