Monday, 24 November 2014


There is little doubt the A-G is deeply concerned over the state of the Province’s finances. In his 2014 Report to the House of Assembly, gravitas is expressed over our dependency on petroleum revenues, the structural deficit, the growing debt, a declining GDP, and other issues.  

Premier Davis would have us believe recent Administrations have exhibited sound fiscal stewardship and there is no need for change. The truth is the Williams’ years, and since, have been marked by a level of financial recklessness that is not only repugnant; it will take years to repair.   

The purpose of this Blog is to not just chastise unwise and undisciplined politicians.  It seeks to illuminate serious public policy issues. The A-G's Report needs plenty of light.

The statements that follow are extracts from the 2014 Auditor General’s Report, specifically Chapter I entitled “Comments of the Auditor General” and Chapter 5, “The Financial Condition of the Province”.  I think those selections represent his most prescient “observations”. (Click on this Link and go to Chapter 5 for more details.)

In my concluding comments I beg, yes, beg the Auditor General to display the utmost courage and uncloak Nalcor CEO Ed Martin and the Muskrat Falls project. First, the Auditor General has the floor:
Public Spending
·         Since 2005, the Province’s expenses have grown from $5.0 billion to $7.9 billion in 2014, an increase of $2.9 billion, or 58.0%.

·         Per capita expenses in Newfoundland and Labrador are approximately 45% higher than the average of all other provinces and are the highest of all the provinces in Canada.

Demography and Population
·         The population of Newfoundland and Labrador is getting older.

·         In 1971, the percentage of the population that was 60 years of age or older was 9%, while in 2013, 25% of the population is 60 years of age or older. Meanwhile, the percentage of the population that is under 15 years of age has declined from 37% in 1971 to 14% in 2013. Furthermore, in 2026 it is forecasted that 33% of the population will be 60 years of age or older, while 15% of the population will be under 15 years of age.

Muskrat Falls
·         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.

GDP Growth
·         Real GDP is virtually unchanged from $29.7 billion in 2007 to a forecast amount of
$29.9 billion in 2014. Real GDP is forecast to decline from 2014 to 2016.

·         The current softness in commodity prices has the potential to significantly impact the
forecast deficit in 2014-15 and the Province’s plan to return to surplus by 2015-16.

·         The cumulative value of surpluses recorded by the Province from 2004-05 to 2013-14 of
$4.6 billion was almost entirely the result of payments received under the Atlantic    
 Accord arrangements.

Deficits and Debt
·          The forecast deficit of $538 million in 2014-15, will be the third deficit in a row.

·          Net Debt of the Province at March 31, 2014 was $9.1 billion.

·          By March 31, 2016, Net Debt will likely exceed $10 billion.

Offshore Revenue
•     In 2013-14, oil royalties were $2.1 billion, or 28.4% of total revenues. In 2011-12, 
oil royalties peaked at almost $2.8 billion.

•    The impact of the offshore sector on the overall revenues of the Province is even greater 
considering that a significant portion of corporate income tax, personal income tax, and 
other direct, indirect or induced revenues result directly from activity in the offshore sector 
as well.

Oil Production 
·         Annual production of offshore oil has shown a downward trend since 2007.

The Public Sector Pension Plan
·         Beneficiaries under the Public Service Pension Plans have increased by 17,000, or 33%,
since 2004.

·         Since 2007-08, the unfunded liability has increased by 117%, and as a result, at March 31, 2014 the total unfunded liability is now greater than it was at March 31, 2005, despite in excess of $3.6 billion in special payments over that period.

         ...employee future benefits expense has increased from $233 million in 2007-08 to $890 million in 2013-14 - an increase of $657 million or 282%.

·          Recent negotiated changes to the Public Service Pension Plan may impact the annual expense, however, the magnitude is uncertain at this time.

What do we make of these observations?

First, I suggest they need to be weighed in the context of the comments contained in Part I of this two part series. The A-G is less crusader than he is economic historian. The Province needs a champion providing oversight of its fundamental economic and financial interests.  

Second, on the Muskrat Falls project, the A-G warns that Nalcor "will have to carefully manage during the construction phase". With respect, that is empty rhetoric.  

Skilful oversight is the only way the worst impacts of the largest publicly funded construction project in the Province's history can be contained.  The A-G must know that the project is on a cost path that will dramatically increase the public debt and impair the Government's budgetary obligations. The A-G needs to expose Nalcor's excesses, examine the contracts already let, and analyse the extent to which they expose the public purse to unfettered risk.  He also needs to slam the Government for its "sham" oversight Committee.

Related Reading:

While the media continues its preoccupation with traffic tie-ups and weather, we rely on a few institutions like the Office of the A-G, ordained by Statute, to stay above what Thomas Hardy calls the “madding crowd”.  

If the A-G wishes to avoid history’s condemnation, he will express more than the equivalent of a "tut, tut" over the Government's unbridled excess; he will stiffen his spine and head over to examine Nalcor’s books.  He will unabashedly exhibit the moral courage that should always be a hallmark of his Office.  

The A-G's reluctance may be connected with the right given the Nalcor CEO to restrict publication of information he deems "commercially sensitive". That is not a reason to be fearful or to hide. On the contrary, any dark corner where the expenditure of huge dollops of public money is conducted, in secret, is where we should find him.  

If Ed Martin wishes to restrict information the A-G deems appropriate for public viewing, let him. The A-G has the right and obligation to report the same to the House of Assembly and to the public thereby.  

Muskrat is a project once "sold" as a $6.2 billion investment.  At last update, the figure has reached $8.3 billion including interest during construction.  Nalcor's monthly reports fail to note schedule slippage and continuing cost overruns. Some highly placed engineers suggest Muskrat is a project heading towards a final cost of $13 billion; others place the figure at 2.5 times the estimate at DG-2.  The implications of such an outcome are staggering. The obligation of the A-G to spring into action is incontestable.  

I beg you to show some courage, Sir.