Thursday, 31 July 2014

WHEN LEGACY TRUMPS COMMON SENSE (SOES PART II)

It is fine to suggest the Province ought to have a ‘Crown Jewel’ like Hydro Quebec or Statoil. But, when the motivation for a monolithic State Owned Enterprise (SOE) comes from a Premier, whose business experience is chiefly in the ‘regulated’ economy and whose motivation is legacy, you can imagine other questions abound.

It seems easy enough. Find a need, like electricity; design a hydro project, develop a set of estimates, engage the markets and the public purse to finance it, execute a power purchase agreement requiring the public to pay it all back and then some.  What could be simpler!

Of course, it isn’t simple at all.   

What if the hot economy isn’t conducive to controlling costs, the management team is limited by a lack of basic construction experience, the captive market needs only 40% of the power, possibly less, and you need to achieve 100% cost recovery from just that market?  What if you are forced to give away 20% of the project’s power potential to achieve export access?

What if you agree to incur 50% of the cost overruns on that transmission link and commit all your remaining ‘surplus’ power to keep your export partner happy; what if you are given a not so gentle reminder all the risk is yours and that the benefits of the Federal Loan Guarantee belong to Nova Scotia! 

What if you are told by the Nova Scotia regulator: take it or leave it. 


To make matters worse, the price of that surplus power must be the lowest possible, set by auction, in a vicious and over supplied New England market, where electricity rates won't cover the cost of transmission  let alone production. 

So, the amount of export revenue you are likely to earn, won’t amount to squat if the final project costs continue to escalate such that ‘rate shock’, among your high paying island-captive customers, is a concern.    

The big fear is they might employ conservation options, new technologies (or, old technologies, like heat pumps and wood) such that far less than the forecast of 40% is needed.

Those are some of the risks.  There are others.  Indeed, we haven’t even mentioned the North Spur or the Water Management Agreement; the recent loss in the Quebec Courts should not be translated as encouragement.

You may have come to realize your SEO is not in the power business at all; what you have signed on for is an expensive, risky, tangly, construction project.

None of this is the stuff of a successful State Owned Enterprise, is it? 

If Nalcor's CEO wakes up on a given morning after folklore’s ‘old hag’ has spent the night sitting on his chest, expelling gnarly threats and warnings of foreboding, he might realize he has been very foolish.  Just possibly, he might hope the Government that gave him licence to be foolhardy might have been at least wise enough to keep a few shekels and provide a margin of safety if it went off the rails.

Now you know that a former Premier, a business magnate, a visionary, too, one hell bent on chiselling a legacy, would have prepared for such an eventuality!

Understanding the vagaries of business as keenly as he must, he would have set down the ground rules so that his own and successive governments, like Dunderdale’s and Marshall’s and successors, would be insured against risk, bad luck, bad judgement or just plain incompetence.  

But, then, the ‘old hag’ comes out of our culture, not Statoil’s Norway.

The safeguards I mention suggest a culture of ‘discipline’.  Discipline is in Norway’s culture. 
Is it in ours? 

It certainly wasn’t a hallmark of the William’s administration, nor Dunderdale’s, nor Marshall’s.

Such a step would have dramatically enhanced NL’s readiness for a future without oil, even without a ‘Heritage Fund’. It would have ratcheted down the risks of giving an SOE a blank cheque.    

That is not all.

In place of imposing limits on government spending, while his risk laden SOE was committing billions, Williams emasculated what was, historically, a very tight-fisted and independent Treasury Board.  He placed it within the Department of Finance, where a compliant Deputy Minister, (the current Auditor General) was no match for a former stingy Treasury Board Secretary.

Williams added 2400 public servants to the public wage bill; he permitted departmental heads to run amuck despite the negligible increase in the population count.

Government Program Spending rose by 75%, growing from $3.8 billion in 2003-04 to $6.6 billion in 2012-13 creating a ‘structural’ demand for steady revenues; he ignored the reality that 36.5% of those revenues are dependent on the vagaries of oil.

Lower production rates, due to both scheduled and unscheduled maintenance, were blamed for the monstrous deficits of 2012, 2013 and 2014; discounting simple profligacy.    

The deficit in the public sector pension plan, alone, adds $876 million to that debt, this year, and the ‘can’ continues to be kicked down the road. 

Is this the discipline, the planning, the serious financial management, all the stuff of which “Crown Jewels” are made and ‘Heritage Funds’ developed? 

Who is kidding whom?

Surely, somewhere in the body politic, there is recognition that a ‘wish list’ alone isn’t enough; management skills, prudent governance, and discipline are key underpinnings of a Province seriously gazing into its fiscal future.

The latest mutterings from Nalcor CEO Ed Martin, his ‘spin’ extracted, place Muskrat’s capital cost in excess of $10 billion. The project has barely begun.  The news should evoke cries of derision from every quarter. But it does not. 

In time, we will ask ourselves why. 

We will ask, too, why groups like NOIA and the St. John’s Board of Trade give standing ovations to one so complicit in advancing a plan of economic folly; one in which none of the true hallmarks of entrepreneurialism are found, let alone held up for public scrutiny. 
Those audiences are sated just by the words “Statoil” and “Hydro Quebec”; they are emboldened simply by the rallying cry: “we want to be like them”!

If that is all anyone brings to Danny’s quest for legacy, I suggest, during those ovations, the admirers remain standing, lest they sit on their credit cards. 

Perhaps, as one commentator noted on Bureaucrats Masquerading as Entrepreneurs (SOES Part I), 'for now they are just pleased to be making lots of money'. 


As for the rest, cold hearted bankers find no currency in the passions of patriotism.  

3 comments:

  1. The Water Management issue, which will determine whether the project can deliver power when needed or only as HQ needs the Upper Churchill, won't be heard by the Quebec Courts until after the next election here. The schedule for production of documents etc. shows that being completed August 2015. That "fact" is of course known to the Premier and cabinet, who are pressing ahead blindly indifferent to the folly of this multi-billion dollar photo op.

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  2. Very good analysis with relevant historical context. The Statoil model worked for Norway because the government guys didn't operate or influence it.

    Nalcor has bulked up on a lot of people and is pushing through an uneconomic project. They have a cost structure like Eastern Health which loses $250 K per year on a Tim Horton's with a large captive market and always lined up around the corner selling 10 cent coffee for $1.50. Nalcor spent $30 M drilling a well in Western NL when the cost range for a similar well in Alberta is between $1 M and $7 M. Granted the people and infrastructure are not yet here but a partnership for a small percentage to one of the juniors in this province could have done about three wells for the same investment and require a lot less people back at the mother corp.

    Perhaps future administrations will change how Nalcor operates and help dig us out of Muskrat. The 77% rate increase announced by Ed Martin in the Telegram (17.4 cents in 2020 from 9.8 cents when most of the analysis was done in 2011-12) will not pay for it if we lose the WMA. Also according to Mr Martin the rate will increase thereafter between 1 and 2% per year or in other words inflation. That is a remarkable achievement to be able to increase the rate 77% in less than ten years increasing with inflation thereafter when it was only designed to replace 12% of the previous power (Holyrood) and pick up load increases. The only known load increases will come from the Vale smelter which is an industrial load and easy to supply from less expensive options.

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    1. There is only one way out of this mess…NALCOR and its incompetent head honchos have to go! Their inability to properly manage energy resources was made painfully obvious during Dark NL but their predictable shifting of blame was their trademark response.

      An entity that touts its own expertise and greatness…particularly a politically-created entity…is not one to be trusted and NALCOR has given us ample reason to be distrustful. Their singular determination to plunge ahead with a clearly unviable and uneconomic project like Muskrat Falls….despite major cost overruns, changing market dynamics, reliance on in-house expertise, hiding behind a wall of government protection from any real scrutiny….all of these traits are the hallmark of an organization that is more successful at navel gazing than they are at developing a successful business model.

      This entity was born out of the grandiose and pompous arrogance of a PC administration that was lucky in the extreme…. but one whose level of competence was never high. They exploited the generous goodwill of the ordinary people of the province and continue to create a province of haves and have nots. Ironic, isn't it, considering our poor cousin status within Confederation for so many decades!!

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