Business

Pulp and politics

The B.C. government keeps on bailing at Skeena

JENNIFER HUNTER March 2 1998
Business

Pulp and politics

The B.C. government keeps on bailing at Skeena

JENNIFER HUNTER March 2 1998

Pulp and politics

The B.C. government keeps on bailing at Skeena

JENNIFER HUNTER

The phone in B.C. Supreme Court Judge Allan Thackray’s downtown Vancouver office rang at 3:30 p.m. on the second-to-last day of 1997. On the line was Clive Bird, a lawyer representing the B.C. government in the ongoing financial restructuring of a company called Skeena Cellulose Inc., which owns sawmills in the central B.C. Interior and a pulp mill at Prince Rupert on the northern B.C. coast.4 The company is struggling to claw its way out of bankruptcy. The province had earlier stepped in with cash to try to effect a rescue. It was Thackray’s job, under federal statutes, to oversee the bailout and make sure Skeena Cellulose’s dozens of creditors, small and large, were treated fairly. But as he began to listen to what Bird had to say, Thackray felt a mounting sense of misgiving. The government, Bird told him, planned to sweeten its offer to small creditors. He wanted to know what Thackray thought of the proposal. “I felt,” the judge wrote in a memo after the conversation ended, “that the government was trying to involve me in a political move.” If that was the case, Bird’s inquiry may have constituted a serious intrusion into the independence of the judiciary. But for the citizens of British Columbia, the outcry that erupted when the call became public last week was only the latest surprising turn in a saga that has so far seen the government pump almost $329 million into the failing company—the largest corporate bailout in B.C. history. At stake, in addition to the taxpayers’ cash and the company’s future, is a good chunk of the economy in a swath of British Columbia from the coast to the inland communities of Terrace and Smithers, 215 km to the east. Skeena Cellulose directly employs 793 people in Prince Rupert, a city of 16,000. But as many as 12 times that number of jobs in the region depend in whole or in part on the company. Even so, critics say the government’s efforts to sustain Skeena amount to little more than life-support for a doomed patient. “It is simply ridiculous to prop up that dead mill in Prince Rupert,” says Les Reed, forest policy consultant and professor emeritus at the University of British Columbia. “It’s being done just to make a cabinet minister’s seat safe.”

Others have come to the same conclusion. Liberal Opposition leader Gordon Campbell called for the resignation of deputy premier Dan Miller, who represents Prince Rupert in the B.C. legislature and is widely regarded as the second-most powerful politician in the province’s NDP government, after his close friend Premier Glen Clark. Miller has been deeply involved in the negotiations to rescue Skeena and it was he who encouraged Bird to make the call to Thackray. But his resignation is unlikely: last week, Clark confirmed Miller’s role in cabinet by naming him minister of energy and mines responsible for northern development in a shuffle of his front bench. Miller himself simply shrugged off

the criticism, asking: “What’s the problem?”

The legal problem, if any, with Bird’s call may become clearer in the days ahead. The Law Society of British Columbia has launched an investigation into the matter. And former judge Lloyd McKenzie, who spoke on Thackray’s behalf, noted: “It is unusual for a lawyer involved in ongoing litigation to phone the judge. There has to be that appearance of fairness.” Injudicious telephone calls to judges have brought down politicians in the past. Both Liberal André Ouellet, in 1976, and Conservative Jean Charest, in 1990, resigned from the federal cabinet after facing criticism for just such indiscretions.

Impropriety or not, there is no getting past Skeena Cellulose’s capacity to cause headaches for its owners. Its last private-sector parent, Repap Enterprises Inc. of Montreal, ran up a $600-million debt during its 11year tenure of the company, investing much of the money in operations elsewhere. Last March, Repap, hoping to make itself more attractive for a proposed merger with Montreal-based Avenor Inc., finally abandoned its heavily mortgaged B.C. investment, leaving its shares in Skeena in the hands of two banks, the Royal and the Toronto-Dominion. Skeena’s managers sought protection from the courts under the federal Companies’ Creditors Arrangement Act—the first step towards bankruptcy. The two banks, meanwhile, began negotiating with the company’s creditors and the Pulp, Paper andWoodworkers of Canada, which represents the majority of the company’s employees, for a formula that would keep the troubled mill operating.

When unionized workers bridled at concessions demanded by the banks, Clark’s government stepped in. First, the govern-

ment announced it would provide $149 million worth of loans and cash, in exchange for a 45per-cent stake in the company. Then last November, Victoria bought out the Royal Bank’s share in Skeena for a further $31.5 million. And in mid-February, the NDP government offered still more money—$65 million—in the form of low-interest loans to small creditors, to secure their support for restructuring Skeena’s debt.

But then Skeena ran into trouble again— ironically, in part because of the terms of the act under which it had sought the court’s protection. Under the restructuring agreed to by creditors, contractors who supply Skeena with logs were to be paid in advance for wood delivered. But when the company exhausted its $ 110-million line of credit, the Companies’ Creditors Arrangement Act prevented it from negotiating the advance of more funds. Contractors responded by cutting off deliveries until they received the promised payment. Finally, on Feb. 19, flush with the latest infusion of provincial funds, Skeena emerged from the supervision of the creditors act and promised that the contractors would get their money by week’s end. Said Justin Rigsby, a financial comptroller for several logging contractors in Terrace: “It’s great news.” The latest provincial undertaking has once \ again kept Skeena’s vital signs alive—if only barely. But critics like Reed are wondering

I when the provincial tap will be turned off. “This bailout could go up to $500 million and you’d still be left wondering whether the * I company could survive,” he said. Asked if I £ the government does indeed have plans to IÈ pour still more funds into the company, emVi ployment and investment ministry 1 spokesman Don Zadravec said only: “I I wouldn’t want to speculate.”

§ But according to many of those who rely on

I the Prince Rupert mill for their livelihood, the 1 government has no choice but to keep the money tap on. Should Skeena fail, says Rigsby, “there was the prospect of 10,000 people losing work from Smithers to Prince Rupert. The social ramifications are huge.” Without the pulp mill, in fact, there is little else going on economically in Prince Rupert. Tourism offers seasonal employment to some, and the city is a rail terminus with a port. But neither activity is poised to make up for the loss of the high-paying unionized jobs that Skeena Cellulose has provided. Meanwhile, fishing, the region’s other economic mainstay, is under intense pressure due to poor salmon runs and competition from neighboring Alaska. (Prince Rupert was the site of a three-day blockade of an Alaskan ferry during last summer’s fish war, sparking an international clash with the United States.) Says Rhoda Witherly, who chairs the Prince Rupert Port Corp.: “Most people are supportive of what the government has done, even though some may have had to hold their noses.”

But government intervention has been tried in the past—and has failed to put Skeena Cellulose on a sustainable footing. In 1973, a previous NDP government led by premier David Barrett took over Skeena’s predecessor—Celanese Canada Ltd.—and assumed the company’s $73-million debt. The Social Credit government that took power in 1975 folded the Prince Rupert mill into a newly created Crown corporation called British Columbia Resources Investment Corp. BCRIC went public but soon foundered, and in 1986 its forest assets were sold to Repap for just $69 million.

The question remains: even with all the money being thrown at it, will Skeena Cellulose ever prosper? Some think it can. “The mill and the people up here have gotten a bad rap,” argues Rudy Schwartz, former Skeena chief operating officer. “The mill has made a lot of money in the past and it will do so again. It’s not the black hole 2 people say it is.”

« But the outlook is far from encourir aging. Pulp prices have sunk to $700 § per tonne, far less than the $850-per§ tonne price that Skeena needs to op> erate profitably. There is intense com¡ petition from Third World countries § such as Chile. And critics say there are already too many B.C. pulp mills chasing too little wood fibre. ‘Ten per cent of the harvest of logs on the coast is consumed by Skeena,” says Reed. “When you put that amount of fibre in a mill that shouldn’t be operating anyway, you simply threaten the existence of other mills.” A better plan, Reed argues, would be for the province to sell Skeena’s potentially profitable sawmill operations, and to let the pulp mill close.

But so far, the B.C. government appears to have no taste for walking away from its investment in a politically sensitive riding. □