(June 17*) Samsung hasn't received 'one cent from Ontario'

Published On Fri Jun 17 2011By Tyler HamiltonEnergy and Technology Columnist

Cheol Woo Lee is feeling betrayed these days.

The senior vice-president of Samsung C&T understands why Ontarians are getting frustrated by higher energy bills, but he’s disturbed that his company is taking much of the blame.

He’s embarrassed that Samsung – its well-known brand and international reputation—has become a political punching bag to win votes. The unfolding drama is being watched closely at the company’s headquarters in South Korea.

“We haven’t received one cent of money from Ontario,” said Lee, chatting over coffee at a downtown hotel. “We’ve only been spending money—and big money so far. Why do we have to be blamed or criticized?”

He was talking about the well publicized but often mischaracterized “Samsung deal,” frequently referred to in the media and by Progressive Conservative leader Tim Hudak as that $7-billion “sweetheart” deal signed back in January 2010 by the McGuinty government.

Hudak has said he will kill the deal if elected in October. Even if Hudak is bluffing, Lee said irreparable damage has been done. “The comment has affected our projects seriously. Our partners, our investors, are considering very seriously whether Samsung can manage the situation.”

You’d think, the way it has been framed, that Samsung stands to get $7 billion from the deal, but in fact it’s the other way around – the agreement requires that a Samsung-led consortium deliver $7 billion in investment to Ontario.

This will involve developing 2,000 megawatts of wind power projects, 500 megawatts of solar, and arranging for a manufacturing supply chain that will provide wind turbines and solar panels for those projects. In all, Samsung’s efforts and promised investments are expected to deliver 2,140 direct jobs and 13,860 indirect jobs.

In return, the company gets a premium – called an “economic development adder” – that’s expected to amount to $437 million during the first 20 years of operation of its wind and solar projects. That works out to about $22 million a year, on top of feed-in-tariff rates that apply to all solar and wind projects.

Getting that adder is conditional on Samsung reaching certain milestones related to investment, manufacturing and job creation. Manufacturers must maintain their operations for a certain period of time. A certain number of jobs must also be maintained.

Part of the controversy is that, at the moment, the details of those conditions have not been disclosed. Lee assured that they soon will be, but only after the company completes final negotiations with some suppliers.

For making its investment commitment, Samsung has also been guaranteed priority access to Ontario’s transmission system, an arrangement that other project developers waiting in the queue consider unfair.

At the heart of the debate is whether a company, any company, deserves to get a premium or special treatment for taking on a big chunk of risk and making substantial guarantees to deliver certain economic benefits.

Is such an approach really uncommon? Have not all political parties, provincial or federal, engaged in such deal-making?

Whether in the form of hidden tax benefits or upfront incentives, big industry – from the auto sector to forestry – have long enjoyed such perks. The difference is that these deals are usually the outcome of hostage negotiations designed to save old-industry jobs, not create new-industry opportunities.

The $427 million that Samsung stands to get also needs to be put into perspective. The federal Conservative budget, for example, is throwing another $405 million at Atomic Energy of Canada Ltd. to cover “anticipated losses” and basically keep the crown company on life support.

This is just for one fiscal year, and it follows past years of similarly large support payments. About $300 million in 2010, more than $800 million in 2009, and so on… Yet Hudak’s energy strategy depends heavily on building more nukes—from one sweetheart deal to another.

For its part, Samsung seems to be following through. The Korean industrial giant and its partners, including Korea Electric Power Corp., have so far spent more than $100 million to get the ball rolling.

They struck an agreement with CS Wind that will see a wind tower manufacturing facility established in Windsor that will create an estimated 700 jobs. They hooked up with Siemens Canada to build a wind-turbine blade manufacturing facility in Tillsonburg that will create 900 jobs.

They most recently partnered with SMA Solar Technology, which through a contract manufacturing deal with Celestica will make solar inverters for Samsung’s projects. That will create more employment opportunities at Celestica’s facility in Don Mills.

“We organized this investment, and we induced this investment,” said Lee, adding that construction and hiring has already started, though it has slowed since Hudak threatened to kill the deal. “Our manufacturing investors are concerned about whether they should continue.”

Samsung has also signed land lease agreement with about 400 landowners, many of them farmers that are counting on the extra income.

I asked Lee why the FIT rate alone, which is quite generous, wasn’t enough of a draw for Samsung? Why did the company need the adder? Samsung, like everyone else, could have come into the province and developed projects on a case-by-case basis, a less risky and more manageable approach.

The adder, Lee said, covers the guarantees that Samsung has been prepared to make in terms of bulk investment and job creation. If it doesn’t hit its milestones, it doesn’t get the adder.

He also pointed out that Samsung is subject to the same uncertainty with respect to regulation and the feed-in-tariff program’s two-year review.

Like other developers, Samsung has been bogged down by bureaucracy at the environment ministry, which has been slow to issue renewable energy approvals. Without them, projects can’t proceed.

And if, after a two-year program review this fall, feed-in-tariff rates are lowered for solar and wind projects, Samsung – like everyone else – can only apply for the lower rates.

At the moment, the company has no power-purchase agreement with the Ontario Power Authority, though that is expected to come shortly for the first 500-megawatt phase of its projects. The remaining 2,000 megawatts, broken down into four more phases, will be subject to the new – and likely lower – tariff rates, said Lee.

Lee is comfortable with those conditions. It’s the political uncertainty that has Samsung, partner investors, and suppliers nervous. Having worked 30 years with Samsung C&T, many of those years dealing with developing nations with volatile regimes, Lee said he is surprised by recent developments.

“Even dealing with African countries we didn’t have this kind of situation. Normally, we enter into undeveloped countries and we take out insurance,” he told me.

“But Canada? It’s one of the G7 countries. So no, we didn’t consider this outcome. Our relationships, our reputation, our credibility are on the line if this contract is terminated.”

So would Ontario’s international reputation as a place to do business, all to save enough money each year on our hydro bills to buy a cup of coffee at Tim Hortons.

Tyler Hamilton, author of the upcoming book Mad Like Tesla, writes weekly about green energy and clean technologies. Contact him at tyler@cleanbreak.ca

Retrieved from http://www.thestar.com/business/cleanbreak/article/1010519--samsung-hasn-t-received-one-cent-from-ontario

* color and emphasis added by the blogger