Thursday, 21 March 2013

Gnarley’s Theory of Political Devolution Part II

The waitress returned with two virgin scotch on the rocks.  The smile on her face was recognition that she had seen this before; two friends about to embark on an afternoon's session.  But, unlike those she had witnessed in the past, the conversation would not be about sports, cars or women.  The subject, this afternoon, was to be focused purely on politics; a vice as destructive as any other.

Although my old friend was certain to eventually lead the discussion to Muskrat Falls, I was hoping to get his opinion on some other burning issues.  I was particularly interested in getting the old economist's view of the Province's fiscal woes.   

But, it was clear that Uncle Gnarley was not yet finished with the topic of leadership.  To move the conversation along, I lobbed what I clearly recognized was not a double play pitch.

"Uncle Gnarley, if you put aside your belief that Dunderdale is a lame duck Premier, what do you consider to be her biggest weakness, as a leader?"

"Nav... a very good question.  The Premier has many admirable qualities which are often overlooked by her detractors.  She appears to be very hard working and has a reasonable intellect.   Although she represents Virgina Waters, she is definitely not from town.  With the Province’s sphere of influence becoming more Avalon centric, there is a geographic disadvantage to any rural politician.  Her heritage enhances her credibility, as she is not part of the establishment.  It must be remembered that she was not born in wealth; her achievements are her own.  These achievements are greater than being the first female Premier...but, I expect that this, alone, will define her legacy".

It had seemed that the afternoon sun had put the generally cantankerous man in a somewhat sober mood.  This was odd considering that his third scotch was now, like our budget surpluses, a footnote in history. 

"Uncle Gnarley, I did not expect such flattery"

With that, the old man looked up; his face clearly indicated that his pause was not meant to be interpreted that he was finished. 

"Nav...  leadership, by acclamation, is not good for any business or democracy.  Competition brings in new ideas; it ignites debate, and lays the foundation for future public policy.  However, when a leader is appointed, as was Dunderdale, it will serve as an affirmation of the policies and ideas of the previous leader.  The PC leadership contest, of 2011, should have seen the first public debate on major initiatives such as the Muskrat Falls Project. 

Instead, the anointed Dunderdale has embraced the status quo.  She has not defined her own vision for leadership, or the future of the Province.  She remains married to the policies of the previous leader, seemingly oblivious to the changes in the world that now make these policies obsolete.  Her conviction, to defend these unsound policies, is a character flaw which has the Province bearing over its own fiscal cliff".

I believe Uncle Gnarley could sense the confusion in my eyes. "For your own benefit”, he added, “I will put this in layman's terms: Dunderdale will not admit that her Administration has made a mistake.  Her greatest flaw is her stubbornness!"  

With that Gnarley took a drink, and nodded to me, with a not so discrete signal, that he was now finished.  No matter how much I wanted to come back with a statement matching the self-proclaimed genius of the old economist, I could not.  To maintain the healthy banter I retorted: indeed a character flaw which neither of us share.   But, Uncle Gnarley, you have my interest peaked.  Is the great mistake, to which you refer, the continued support of the Muskrat Falls project?

"Nav, a mistake it is...but, in this case, it is more the symptom".

I took a drink, and was slightly frustrated as it appeared to be an afternoon of riddles.  I stayed silent with hope that the old man would continue. 

"The real mistake, of this government, is that their entire policy seems to be predicated on the naive belief that energy prices will return to the peak pricing seen in the period from 2006 to 2008.  The foundation of the Government’s policies, whether it be increased government expenditure, investment in oil projects, or even Muskrat Falls, is underpinned with the hope that oil will return to 150 $/barrel, and that it will get there very soon!"  

With the labours of the afternoon dulling my cognitive ability I had to ask for clarification. I am not sure what you mean, did the government not budget on 124 $/barrel in 2012?

"Nav... as usual, I can depend on you to confirm the obvious.  This might have been a plug number, thought to be conservative, but to ensure a better than predicted, fiscal performance.  But, make no mistake; the government’s increased spending, their investments in Nalcor, and their projections for electricity demand growth clearly demonstrate their hope that the good times are once again just around the corner.  They are a Government steered by blinding optimism.

As the Premier said in the house last week, it was no surprise that there is a deficit, and anyone smart enough to read the previous budgets would have realized this fact.  Well, this is true.  Since 2006, this government has been spending like sailors on shore leave.  It is out of control and not sustainable.  Some of the Government's greatest allies  have identified this fact, as have some of its most astute critics.

Even the Atlantic Institute of Market Studies, some seven years ago, forecast what was going to happen within the decade.  In her 2011 year end interview, with David Cochrane, the Premier, herself, also identified that this was a major issue. Yet, there has been no action.  There has been no plan.  There has been no strategy to deal with this spending crisis".

I interjected, Uncle Gnarley, don't you mean deficit crisis.  Is this just as much a revenue issue as it is a spending issue?  The old man looked at me with frustration.  Uncle Gnarley had a great head of steam, and was about to blow.

"Nav...  I refuse to call this a revenue issue.  The government still reaps the benefit of royalty and tax revenues which would have been the envy of any former premier.   Oil is trading at 115 $/barrel, well above historical pricing.  Make no mistake this is a spending issue.

"So, instead of accepting the blame for their own mismanagement, the Premier is fingering commodity prices, previous governments, and the Opposition.   By not putting the blame on herself, and the PC Party, she is insulting the intelligence of every Newfoundlander and Labradorian.  Her spin is transparent to all who make the effort to look".

"Nav, there is hope.  The Premier and her Party have had their heads in the sand for three years; but, they seem to finally have awakened to the severity of the situation.  The Province is looking at a deficit of 12-17% of their annual revenue.  This is as bad as the period from 1920 to 1932 which led to the final collapse of the Nation.  Do you know, Nav, that Newfoundlanders and Labradorians are the only people, in history, to freely give up their democratic franchise?  This is unimaginable, but it was forced upon us by the heavy burden of debt.  The self-imposed 'holiday from politics' is a history lesson which should not be forgotten by any modern leader".

Uncle Gnarley seemed to gaze out the window to the park out across the street.  He then continued his narrative:

"One of history’s greatest leaders, Sir Winston Churchill, said that, 'He was not a lion, but was expected to make a lions call'.  I am sure that Dunderdale never thought that she would have to preside over budget cuts as severe as what is required.  I hope that she is up to the challenge. 

"I also hope that this will cause the Premier to reflect on the elephant in the room.  This $1.6 billion deficit will signal that she needs to personally challenge the assumptions used by the Department of Finance and Nalcor.  Just as it was careless to increase Government spending by 75% in five years   so too is it reckless to continue with the Muskrat Falls Project, as it is currently envisioned.    She has to challenge the experts as the failure of a project, the size of Muskrat Falls, will mark her epitaph".

But, Uncle Gnarley, I suggested, she is not an engineer, nor an economist.  She has to depend on the experts to provide guidance on a project as complex as Muskrat Falls.  You, yourself, often struggle to understand the economics.

"Nav, one of the world’s most noted economists, John Galbraith, had a saying that when government's rob Peter to pay Paul, they can always count on the support of Paul.  Well, the Premier is certainly smart enough to recognize that, in this analogy, Nalcor is Paul. 

The Premier needs to step back and evaluate the basics on the Muskrat file.    Even the most complex engineering and economic subjects can be effectively understood and communicated in simple terms.  Muskrat Falls is no different".   

With that Uncle Gnarley took the sketchpad he brought into the restaurant.  The old economist began to write down some simple calculations:

                                              Equity Borrowed   $1.5 billion

                                              Debt Borrowed      $6.4 billion

                                              Total Debt              $7.9 billion.

                                              Interest Rate    5%

                                              Annual Interest Cost Only:  0.05 x $7.9 billion = $395 million


                                             Total Possible Energy   4900 GWhr

                                             Nova Scotia Block   1000 GWhr

                                             Energy for Sale   3900  GWhr


                                             Market Rate      50 $/MWhr

                                             Emera Transmission Fee    10 $/MWhr

                                             Final Market Sales Rate    40 $/MWhr


                                            Total Revenue:    3900 GWhr x 40 $/MWhr = $195 million

                                             Annual Shortfall:  $200 Million (interest payment only)

 "You see, Nav, despite the rhetoric, the only way this project is happening is that it is being paid for by Newfoundlanders and Labradorians.  Actually, under Bill 61, the low electricity rates enjoyed by Labradorians will remain unchanged.  The Project is being paid for by the island consumers only.  We will be paying over 200 $/MWhr for Muskrat Falls energy, which is about 4 times the going rate!

"This is before cost over-runs, or unknowns such as uncertain soil conditions come to fruition.  It truly is Muskrat Madness which has afflicted this government".

With the numbers so plainly presented, in front of me, I knew that the old economist was not 'all wet'.  Still, I do have some faith in the professionals at Nalcor. 

Uncle Gnarley, you are, once again, forgetting that continuing to burn oil at Holyrood, as an isolated island source, will even be more expensive to islanders. 

“Nav... an interesting thought; but, this is where the Premier needs to use her common sense.  Currently, we are spending about $130 million a year for oil at Holyrood.  Why would we spend $395 million, in interest alone, to save an expenditure of $130 million in oil?

"Would it not make better sense to acknowledge the merit in our modest proposal; that is, build the link to Labrador now and build the dam later, when the demand or US prices warrant the investment?

"Nav... not only is it a lower risk, but the proposal also potentially represents a lower overall cost.

"In this economic paradox of a booming economy, but a crippling deficit, I see no good reason to not implement a phased approach". 

It was true; the merit of the staged project development was clearly obvious, even to the uneducated.  It was clear that it would de-risk the project, allow the remaining technical issues to be resolved and permit the workers on Hebron, the Wellhead platform and Vale, to transition into the Lower Churchill Project.  This strategy, alone, would help provide long term sustainable construction jobs in the Province. 

Gnarley, it is clear that this is, indeed, a face saving measure for the Premier; but, it is also a better option for all tax payers.  Do you think the Premier will give it due consideration?

"Nav, I have faith that any leader, who faces the dire financial situation in which the Province finds itself, will look at all available options.  I hope that Dunderdale examines this objectively.  The adaptation of our modest proposal does not represent failure.  It is adjusting the strategy for an ever changing world.  It would be smart leadership, and one if properly explained to the people of the province would be embraced."

With this, I thought of another quote from the famous economist John Galbraith.

All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership.

With these words, both Uncle Gnarley and I finished our drinks.

 It is clear that the mood of the electorate is changing.   People are both frustrated and concerned that, in this white hot economy, a government with the financial means like no other in our history can mismanage the books to extent which apparently has the PC government.  I only hope that my old friend was incorrect in assessing the Premier's character flaw.  Hopefully, Premier Dunderdale will acknowledge what is blatantly obvious to all us 'Peters'.  It may be the right Project; but, is it the right time? 

Uncle Gnarley abruptly interrupted my thoughts as he got up from the table.

"I am heading to the library.  With all this reference to John Galbraith I remember one of the first books on economics I read almost 40 years ago.  The New Industrial State is perhaps essential reading once again. 

"Nav… I have one departing word on leadership, which you can take back to your professor:  Great leaders tend to be students of history".

Editor's Note: This Post was written by "JM", the anonymous reseacher, writer and
presenter, to the PUB and in local Blogs, on the Muskrat Falls Project. JM has written a
number of Uncle Gnarley pieces, including, most recently, Gnarley's Theory of Political Devolution and The Great Revolutionary from the Shore
. His latest Paper is entitled: Muskrat Falls Revenue Stream: Fact or Fiction  - Des Sullivan