Monday, 28 July 2014

BUREAUCRATS MASQUERADING AS ENTREPRENEURS (PART I)

We live in part of the world which has a highly developed free enterprise economy, access to capital and to markets; yet, state capitalism still thrives.  

This is not just a Newfoundland and Labrador or a Canadian phenomenon; state owned enterprises (SOES) are a feature of governments almost everywhere.

Norway is one of the most successful of countries engaged in SOES; Statoil is its flagship along with a ‘Heritage Fund’ that is approaching the trillion dollar mark.

Arguably, state capitalism boasts a high level of popular support even in countries where private enterprise is by far the predominant generator of GDP.

In the ’80 and 90s many state governments, including Canada’s, pared SOES after subsidies and poor governance became far too burdensome on the public purse.  Selling them rid the state of their operating losses and helped reduce debt.

In this Province, the Newfoundland Liquor Corporation (NLC) continues to operate as a Crown Agency.  But no SOE, not even NLC, causes intoxication as does the word ‘hydro’.

Newfoundland Hydro, at least prior to DarkNL, has always evoked something akin to patriotic pride.  Our hydro resources, particular those on the Churchill River, are a national symbol, perhaps emblematic of the economic ‘potential’ we thought out of our reach.

The Government of Clyde Wells placed Newfoundland Hydro on a privatization course in the 1990s at a time when the public debt was rising to an unmanageable level. Public kickback forced him in a different direction; he chose budgetary restraint, instead.

Whether our society has been conditioned by historic grievances with Quebec Hydro, the 1974 decision to nationalize BRINCO, or the salvage of jobs at troubled companies like Newfoundland Hardwoods, the Labrador Linerboard Mill, and Fishery Products, is matter of some debate. 

But one thing is clear. Premier Danny Williams’ ‘energy warehouse’ found a receptive public; one ready to embrace state capitalism. Given Wells’ rebuke, Williams was on safe, perhaps even hallowed ground as he set the trigger for the state to become entrepreneur in a big way. 

The public’s subscription to a very socialist idea and the unprecedented revenues which flowed into the public coffers as oil exceeded $140 a barrel, in 2008, made the decision easy for a politician like him.  

Notwithstanding our frequent forays into and our losses on SOES in the past, Williams’ expansion of state capitalism might seem unusual for a Premier with a business background; that is until one considers his experience, in the cable business, is identical that of a “regulated” utility, like Hydro. 

The cable business receives a ‘regulated’ rate of return approved by the CRTC.  This is due to its near monopoly status; only a few companies occupy the cable space in the local economy. A ‘regulated’ return implies the Utility has to make money unless management screws up or chooses to bulk up staff with overpaid underperformers, as SOES are wont to do. 

If Williams possessed any skills in the dog-eat-dog world of “non-regulated” competition, he chose not to share them or even voice warning as to the perils of state ownership.

A month ago, 2014 June 21, Williams spoke to the annual NOIA Conference giving him a platform to declare Nalcor our “Crown Jewel” our “Statoil”.  The hyperbole served as admonishment to the critics who have discredited Nalcor for being blind to the risk involved in a single large project, to inexperience and to a changing marketplace.

Williams’ inflated lingo constituted an appeal to a loyal public to chastise recalcitrant sceptics, simultaneously stroking their patriotic zeal. He reinforced the unfounded belief that our bureaucrats can do what few governments have executed successfully.  But more than anything he was beating his chest, placing claim one more time, to the ‘energy warehouse’ concept; ostensibly, his defining legacy.

Even if you embrace the idea of SOES, a ‘legacy’ proclaimed prematurely surely suggests a lack of class, of seasoning and of discipline, or even knowledge of these characteristics.  Of course, some of the breast beating is just old style politics; but showing through is an acumen that has always counted on the ‘regulated’ world. 

Williams, like his protégés at Nalcor, are about to discover there is little ‘regulated’ in the business of construction, a place where thin margins on the ‘bid’ are met with canny managers and fat profits on design changes; all euphemistically called 'overruns'.  Is the public ever in for a bruising! But, I digress.

In the real world, it impresses no one that a leader will form an SOE and declare it a “jewel”, our “Hydro Quebec”, our “Statoil”, as if a company’s mere $600 cost of incorporation were proof of accomplishment. 

As much as we may feel Hydro Quebec took advantage of its geography, economic and political heft (not to mention the stupidity of local politicians) it has a long history.  Its ‘power house’ stature rests on 61 hydro plants producing 36,000 MWs. 

Statoil is an international company, 64% Norwegian State owned, which (together with its predecessor Norske Hydro) has been managing, exploring and developing oil and gas resources since 1972.  It has subjected itself to the requirements of several stock exchanges, relies upon the capital markets, respects minority shareholders, is deferential to the concepts of disclosure and transparency and holds itself out to the scrutiny of its investors and the investment community world-wide.

One of the reasons these jewels have survived is that their investments are guided not just by the need for a return on capital; they also understand the concept of risk. They have endured years of repeated challenges; they have proven skills and have contributed to their host Governments.  They are not millstones, as are most SOES.

When Nalcor achieves a fraction of the success of these companies, after having paid back the considerable capital that is now recorded by the Government as public debt, money Nalcor denominates as ‘equity’, we may re-think our view of Nalcor and of Danny Williams, too.

We have licensed bureaucrats to masquerade as entrepreneurs.  

When so much talent, money and leadership, in a free enterprise economy, is available – ready to be risked, sparing an unwary risk averse public – and the opportunity is waved in favour of legacy, you know it is time to recall the shibboleth of ‘the fool and his money’. 

As much as the public may be endeared to the concept of state ownership, Danny Williams and Ed Martin ought to be wary of any claim to 'crown jewels'; no one likes glass at a coronation. 


As to Williams’ legacy….the one cheering loudest is Danny…from the sidelines!

5 comments:

  1. Danny's luck with the cable business resulted from what he himself called a perfect storm: selling in a market place where 3 companies were competing to buy him out. This outlook may have influenced his decision for the Muskrat Falls to export energy, having 3 potential buyers for the energy : Hydro Quebec, Nova Scotia and new England, but this was before the shale gas revolution that destroyed any profit potential.
    In my early days, in the 1970s I bought into Joeys praise for John C Doyle and bought $5000 of Javelin shares. I lost my shirt. Doyle was a crook. I eventually recovered $500 from the USA who took action in the courts. A learning experience.
    About 1995 I "invested" (actually speculated) and bought $500,000 of Fortis shares. Clyde Wells had been CEO of Nfld Power and now as Premier wanted to sell off Nfld Hydro. I felt no one could stop him and the deal would drive up Fortis shares. I knew none of the players, it was just a gamble. I was pleasantly surprized to see our citizens revolt against this and Wells change course. I made no money, nor lost any, and preferred the outcome that we retain Nfld Hydro, with it's valuable assets in public hands.
    After the great recession of 2008, I moved into Bell Aliant stock, which payed a 7 percent dividend in what was risky times in the stock market. A regulated company, majority owned by Bell Canada. It seemed low risk, was expanding into the benefits of fibre optic technology and could lose only if people gave up TV and their internet. Last week Mother Bell announced they would take full control of Bell Aliant. My net worth made the biggest gain ever, some 1.25 million in one day. I guess I learned a little from the John C Doyle days.
    As an investor I am with the critics who feel Muskrat Falls is fatally flawed. More risky that John C Doyle's schemes. And I am surprised that there has not been a revolt by the public against those who would put us to such risk. What financial merits it once appeared to have has long ago evaporated. How could the public have seen through and turned against lawyer- Premier Wells but not lawyer- Premier Williams? Is it that Williams's personal success in business assures the public that he knows best? Would he misinform us to his benefit? Would he buy into Emera if our public assets are sold off to pay the indebtness of the Muskrat Madness, like I bought into Fortis when I felt we would lose Nfld Hydro in 1995?
    My gamble, in dollar value, is peanuts to Williams's ability. For many this is a mere money game .No risk except for the ratepayer and our grandchildren.
    A friend of mine, an engineer with a consulting firm, admitted that Muskat Falls made no sense, but smiled and said "who cares, we're all making lots of money". No risk except for the common ratepayer, and our grandchildren of course.

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    1. go look at share purchases in emera mid december 2010...

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  2. I am very grateful for the voices who have the time and expertise to research the "other side" of Muskrat Falls. It is too complex for most of us get our heads around and failing any trust in our elected officials to give us a balanced view of the venture...blogs like this and books like Muskrat Madness (Cabot Martin) are the only sources we have to form opinions other than the political babblegab. History will not be kind to Mr Williams or, in retrospect, Mr (Brian) Tobbin but it will note they died very, very rich. Not the legacy we all strive for. Thank you for taking the time to do this work and inform our views.

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  4. The people of Iceland have much to teach us. Remember when this tiny country told
    the British to stop fishing Icelandic waters? The brazen Icelanders took on the British navy and won. When their banks collapsed? They got rid of their political leaders.
    The people of this little place actually RUN their little place.

    Here in Nl, we elect spineless fools because we're too lazy--too afraid--to leave out
    homes and go out and protest.

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