Regular readers of this blog will notice the stunning similarity between the agreement signed in St. John's today and the revised version of the December deal posted here a few weeks ago under the title "First we assume a can opener". The language is somewhat simpler but the deal is largely the same.
[Note 15 Feb 05 - There are two additional points I have added. As noted below, one of my sharp-eyed readers caught a mistake of mine in the initial review - in paragraph four and five the province can go on and off the 100% offsets. The Premier's claim is intact, although this arrangement is still less than he wanted and its actual performance depends on the cirucmstances as they occur.
As a second point, Premier Williams apparently dismissed the document signed on Monday as having no legal weight. I am not sure why he would make this comment since it is supposed to represent the agreement he reached. If it has no weight, i.e. no meaning, then why did he bother having anyone sign it and why is he posting it to the government website. ]
Let's take a closer look:
A. The provincial government already collects 100% of offshore revenues.
"2. This document reflects an understanding between the Government of Canada and the Government of Newfoundland and Labrador that:
- Newfoundland and Labrador already receives and will continue to receive 100 per cent of offshore resource revenues as if these resources were on land;
- the Government of Canada intends to provide additional offset payments to the province in respect of offshore-related Equalization reductions, effectively allowing it to retain the benefit of 100 per cent of its offshore resource revenues. "
The first bullet point is an admission for those who doubted it that the provincial government already receives its full share of revenues as provided under the real Atlantic Accord. For all those who argued something else - including Danny Williams - this is a huge admission
B. Once the province is off Equalization it loses the new offsets.
[Note 15 Feb 05: See the appended comments for more on this. One of my sharper-eyed readers picked up a point I missed. Apparently this agreement does make it possible to go on and off the 100% offsets. As I note in the response comment, though, the actual performance of this section in delivering bags of cash to this province depends on the actual performance. I still feel like Emily Litella - 'Oh, never mind."]
In some initial media interviews, Premier Williams suggested that under this agreement, Newfoundland and Labrador could qualify and not qualify for Equalization. If it re-qualified during the agreement, the offsets would be restored to 100%.
Scan the deal and find a single sentence that says that. You won't find it.
Paragraphs four and five provide that once the province ceases to qualify for Equalization in the first eight year period, the original declining Atlantic Accord offsets apply and that for the eighth year, only Part 1 offsets are applicable.
There no provision to restore this new agreement's offsets if the province fails to qualify for Equalization in any year up to and including 2012.
C. The money must be used for debt reduction.
Consistent with Premier Williams' original proposal (not the post-June 7 version), the provincial government commits to using the new revenue to reduce its debt. From paragraph six: "This payment [ of $2.0 billion] will allow the province to reduce its outstanding debt."
D. The only hope for additional revenue under this agreement lies in the second eight year phase.
Paragraph six governs the lump sum payment and provides that no new money is due and payable until such time as the total value of offsets exceeds $2.0 billion. The Accord offsets were already negotiated and do not count as new money under this arrangement. Draw-down against the lump sum does not include the original offsets since it is specifically linked to new payments made under paragraphs three and four.
E. Qualifying for the second eight-year phase is harder.
As noted in earlier posts, in order to qualify for the second eight-year phase, the Government of Newfoundland and Labrador must qualify for Equalization in either year between 2010 and 2012. In addition, its per capita debt servicing costs must not be lower than that of four other provinces.
This two-step provision will be harder to meet than the December proposal's one step qualification criterion.
In addition, the current detailed discussions noted in the post "Counting Chickens" take on a greater significance. Meeting the second condition will depend entirely on the calculation of per capita debt servicing costs. Hence, the wrangling on the definition of that term.
This is a preliminary review of the agreement as released during the signing ceremony.
Having seen this document, it is harder to understand Dalton McGuinty's concerns. It likely also explains the overwhelming emphasis on pride today as opposed to the value of the deal itself.
4 comments:
Ed:
In regard to your point B: read the agreement more carefully. Sections 4 and 5 work together and address the offset payment in each year. Section 4 says 100% will be paid if the province is on equalization in any year. Section 5 says if the province is off equalization in any year the offset will be reduced. If the province requalifies for equalization, section 4 kicks in again.
As for your point D, the January 28 agreement signed on February 14 is better than the October and December offers because extra revenue will go to the province if the price of oil or production drops low enough to make the new offset payment less than $2 billion over 8 years. $2B will operate as a true floor - a new concept not covered before January 28.
I love anonymous comments. How much trouble is it to add a name and an e-mail addy or something that identifies who left the little remark? Maybe I'll call you Wade.
Anyway.
Before we go any further, I must draw attention to Premier Williams' comments on Monday to local news media. Apparently this document doesn't have any legal weight. Therefore, I am not sure I didn't waste a bunch of time bothering to read a worthless piece of drivel.
That said, the comments I made were a first blush reading.
On the point of first phase offsets, I have gone over it a couple of times and I would agree that it says offsets can switch on and off depending on Equalization status. It is not plain English but that is the effect of the two sections taken together. I'll concede that point in the language although its actual impact depends heavily on economic performance.
I still go back to a point I made earlier in a couple of posts on Wade Locke's assessments. If the price of oil stays high over a longer period than one or two years or if there are a series of peaks, then we would wind up off Equalization more than on it.
Note that this deal appears to lead us back to declining offsets -not the 30% generic solution which in some years will yield more cash than the real Accord's offsets would.
As for the notion of a "true floor" which sounds like very Danny-esque phrase, I am not sure of the point. If the price of oil drops, the value of the offset drops and the province would likely never cross the Equalization threshold. We would collect under the deal, but the amount is far less than of the price were higher.
Therefore, logically, $2.0 billion represents the maximum attainable -a ceiling - not a floor. If the price goes up and we go off Equalization and stay off for an extended period, then it becomes a "true floor" because then we won't earn less.
As for whether or not this was attainable earlier, oh anonymous commentator, recall that the notion of a lump sum was proposed in October. It is hardly a new concept. We have no idea if it could have been attained or was even discussed in December.
On the whole, I stick to my contention that the January deal is December with some relatively minor adjustments. On the whole, it could have been attained then or shortly after with out the histrionics.
Ed:
Good recovery. Two quibbles.
First, one person's floor, another person's ceiling. The point is that it offers protection when oil prices and production are so low as to make the new 100% offset payments worth less than $2 billion over 8 years; and it also operates (as you rightly note) if the price of oil is so high that the province goes off equalization.
Regarding October, it did indeed have a lump sum payment, but hardly comparable. The lump sum in October was an estimate of the totality of existing Accord offset payments and new payments. The new lump sum payment is only tied to new offset payments. Furthermore, the October lump sum payment was a fixed payment in lieu of all other protection within the 8 year period. The new lump sum payment is a floor beyond which additional payments are permissible and may mean substantially more revenue.
These extra features (on top of $600 million more in the base) make the final agreement a major improvement over October. And given that the lump sum was dropped in the December offer, it is also a major improvement over December.
Round two, Shadowy Commentor:
Floor or ceiling. If oil prices drop dramatically and remain low - a highly unlikely scenario - then the $2.0 billion represents an amount greater than the offsets would likely be worth over the life of the 16 years with low prices.
If prices stay where they are - a more likely scenario - then the province would likely be off Equalization for a longer period, hence it becomes more likely that the $2.0 billion is roughly all the deal would be worth. That's covered in one of my other posts.
As for the lump sum's novelty, again, I draw you back to an earlier posting. The pay-out figure of $1.4 billion was based on an old estimated average price per barrel for oil. Adjust the anticipated price for oil and poof the deal has the same value over the initial eight year phase, especially if we can't qualify for phase two offsets.
The main point to bear in mind - as I have said repeatedly in other posts - is that the notion of a lump sum was attainable earlier than January and in no way represents some splendiferous and magical thing which makes December radically different from earlier federal propositions.
There is no reason to believe it was a radical concept in January that wasn't available in December or immediately thereafter in normal negotiations.
I invite you to read some of the other posts on the January 28 deal. These issues have been addressed already.
For this deal to pay off, oil prices have to drop but then only as an adjunct to the real Accord. In more likely scenarios, the real Atlantic Accord is the one that provides the substantive benefits.
It's $2.0 billion. Don't try and make it more than it is.
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