By Lawrence Solomon, Financial Post
Obligations that are odious should not be honoured. So says the Doctrine of Odious Debts, a theory first postulated by Russian legal scholar Alexander Sack in 1927 that is now increasingly accepted by international bodies such as the United Nations and the International Monetary Fund, as well as by today’s legal scholars.
That doctrine, to date, has been applied chiefly in undemocratic settings, where tyrants callously rack up debts that a hostage citizenry is then expected to repay. It may soon be applied more broadly in democratic states where elected leaders fail in their fiduciary duties, wrongly saddling current taxpayers as well as their children with dubious obligations that do not benefit them, and that they didn’t request.
In the United States, governments at the state, county and municipal levels are beginning to roll back pension obligations that previous governments had negotiated with civil service unions, arguing that the pensions are unreasonably rich and unaffordable. These odious-debt-type cases between unions and successor governments are expected to ultimately be settled by the U.S. Supreme Court.
For Canada, let me offer as a test case my province of Ontario, where the government of Premier Dalton McGuinty has embarked on a spending spree in the name of creating green energy jobs. Under McGuinty’s plan, the province will replace its fleet of coal plants — among the cleanest, most reliable and most economical in the continent — with renewable power contracted from developers at windfall rates — as much as 20 times the cost of power from coal plants. Some of the contracts are flipped after signing — the contracts are so ridiculously generous that the same one can generate quick profits for multiple players.
None of the contracted-for power is needed, except to fuel the aspirations of McGuinty and his government — they boast often that Ontario will be the only jurisdiction in North America to entirely phase out coal plants. The green jobs that the government uses as its rationale are also ephemeral — studies elsewhere show that green energy developments not only fail to add to employment, they typically lead to the loss of more jobs than are created. More evidence of misguided policies: Rather than leading to modest electricity rate hikes, as the McGuinty government initially promised to wide skepticism, his green agenda is now fuelling double-digit annual rate hikes.
As electricity rates soar in the province during the 20-year terms of the contracts and beyond, Ontario businesses will flee and Ontarians will join the growing ranks of those in fuel poverty. Holders of the contracts, meanwhile, will be gleefully taking in tens of billions of dollars in untoward payments from captive Ontario ratepayers.
The Odious Debts Doctrine was developed to consider the debts of a despot such as a Saddam Hussein or a Robert Mugabe, where borrowings benefit the dictator and his regime, not the people as a whole. “This debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power,” explained Sack, adding that odious “debts do not fulfill one of the conditions that determine the legality of the debts of the State, that is: the debts of the State must be incurred and the funds from it employed for the needs and in the interests of the State.”
Are Ontario’s entirely unneeded electricity obligations odious? Somewhere on the continuum between obligations incurred by a Mugabe, a dictator who acts clearly in his own interest, and those incurred by a selfless leader, who incurs debts only for the betterment of his constituents, lies a McGuinty.
Many argue that McGuinty is failing to live up to his fiduciary duty to the people of Ontario, and that he is committing the present and future generations of Ontarians to obligations in which they had little or no say. In his zeal to push through his plans, McGuinty not only offered outsized payments to favoured suppliers, he even extinguished the traditional rights of communities to object to developments within their boundaries.
In Canada, a future Ontario government can amend or extinguish the McGuinty contracts by regulation or legislation — parliament is supreme. While that may seem an extreme outcome, the pressure on a future government to do so could become irresistible amid the soaring power rates and declining economy that would result if the McGuinty plan was ever realized. The ultimate lesson for governments: Don’t be a party to investments that could be odious.
Special to the Financial Post
Lawrence Solomon is executive director of Energy Probe (ep.probeinternational.org) and the author of The Deniers.