Monday, 17 November 2014

A-G's REPORT IMPORTANT BUT NOT COMPLETE (PART I)

The Report of the Auditor General for the year ending March 31, 2014 is important for the observations he offers regarding the state of the Province’s finances.  He delivers comment (but no conclusions) on the impact of oil on revenues, the pattern of government spending and how the lack of fiscal discipline is resolving into a serious structural deficit. It is a story told in charts and graphs more than as a written narrative.     

The Report comes as the world price of oil has experienced a 25-30% hair-cut.  Many wonder how the Government will curtail public spending without injuring the economy. Yet, everyone knows the time has passed for the easy method of fiscal restraint.  

The A-G’s Report deserves two very different comments.  

One relates to its incompleteness, though that is partly the fault of the Department of Finance, on which the work is based.  The second is why it is important; a matter which will be dealt with in a subsequent Post. 

On the issue of completeness, the Finance Department’s data fails to properly reflect the demands of an uncertain, changing and challenged economy.  It ignores the importance of integrated and comprehensive data to the ability of businesses and individuals to make sound decisions given ours is an economy exposed to major and sudden changes.

If, for example, you want to assess the impact on the Treasury of megaprojects like Vale, Hebron and Muskrat, with their high paying jobs and large multiplier effect, or how budgetary revenues may be affected as they wind down, you would be out of luck.

Employment and government revenues reflect those megaprojects along with a boom in the housing sector, significant infrastructure spending, and a large, but largely unquantified, mobile labour force Alberta bound. 

Though a long established phenomenon, if you ask how many workers regularly leave this province for Western Canada (the Globe and Mail knows), wonder what the wages contribute to local GDP or to government revenues, or if you want data on the impacts on the local economy of the curtailment of some percentage of that activity, again, you will get no assistance  from the Finance data.  

Some agencies may wish to assess the social implications of such change and prepare for an increasing demand on their services.  Likely, they will wind up flat-footed.

Presumably, the Government is performing econometric modelling of the NL economy on a constant basis.  The presumption suggests current data on employment, personal income, and government revenues including inputs for the oil price and other sensitivities, like project schedules, are accounted for. Large Corporations supply shareholders with "guidance" on their near term performance. But the Dept. of Finance is unable to share basic data and analysis on a relatively small economy to prepare them for even the next six months.    

It is disappointing that the A-G fails to show the Department of Finance how it might do better.        

His comments regarding the public sector pension plan are also noteworthy.  While he correctly states that the agreement to modify the pension plan will reduce the obligations of the government in the midst of a vastly expanded eligible group, he does not question the Government’s decision to seal a deal in which that reduction remains undefined and hence, not fully understood. 

Perhaps flat-footedness is a malady suffered by the many.  It still boggles the mind that the Union leadership chose to be among the Muskrat boosters without, at the very least, having first secured a large percentage of the unfunded pension liability when the Government had the funds available. The Government’s “Promissory Note” will provide little comfort if the three ‘black swans’ (Muskrat overruns, low oil prices and a structural deficit) waddle lock-step. 

Then there is Muskrat Falls. The A-G makes this observation:

"The size and complexity of the development creates considerable risk that the Province and the proponents will have to carefully manage during the construction phase. Ultimately, any risks related to project execution (including costs and timing) will be borne by the taxpayers, ratepayers, or both."

That is hardly a courageous comment.

Ostensibly, that is the A-G's way of confirming he is serving notice on Muskrat. He does not suggest that he plans to examine how the Crown Corporation is messing with the Public Tendering Act under the guise of “best value” in whatever way Ed Martin and co. define it. 

Similarly, he does not indicate that he will audit the Muskrat contracts already awarded to determine the exposure, to the Province, of Nalcor’s failure to secure “fixed price” tenders.

He does not acknowledge that Nalcor has assumed most of the construction risk by accepting the cost of labour as its risk.  Neither does he demonstrate concern that the Government has established a ‘sham’ Oversight Committee; one that has yet to get the attention of Premier Davis or even file its second quarterly Report.

There is one bright spot even if it is a small victory.  The A-G acknowledges “Interest During Construction (IDC)” of $1.3 billion, as one of the costs of the Muskrat Falls project.  That is something Ed Martin has always refused to do.  The A-G quotes the latest forecast estimate as $8.3 billion, even rounding off Nalcor’s constructed figure, for PR purposes, (without IDC) of $6.99 million.  Perhaps, the media will stop quoting the lower figure, following which Ed Martin might catch on.

The A-G is not in a line of work that calls for diplomacy.  The Province’s chief Auditor is in the business of – dare I say it - “oversight”. His authority and his Office should be giving Ed Martin night sweats.  Instead, Nalcor don’t know it exists.

When the Government fails in its duty, whether by engaging in imprudent public spending or by turning a blind eye to the excesses of the largest publicly funded project in history, or when the Department of Finance wilts at the political risk of providing better data, tying the megaproject economy to people and businesses who make important decisions every day, the A-G’s Office should say so.  Where the authority has been granted his Office, under Statute, it should step in. 

In time, this A-G will have to explain why he cowers to Ed Martin when so much is at stake.

While the Government is carving out a legacy of recklessness, the A-G should be etching one that is completely unassailable, earned with frequent displays of energy, determination and courage.  He has a lot of catching up to do.

Still, none of these comments diminish the importance of his Report.

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