14 January 2005

The Prime Minister responds to Premier Williams

Dear Premier:

I have read your letter of January 3, 2005, with respect to our discussions on the treatment of offshore revenues. This is an issue of great importance to me as it is to you as Premier of Newfoundland and Labrador. I want to take this opportunity to lay out the principles that guide the Government of Canada in these discussions.

I have been clear from the very beginning of our discussions that I fully acknowledge the importance of offshore revenues to Newfoundland and Labrador. This reflects my recognition of the province’s proud history and of the determination of its people to seize the offshore opportunity to enhance their economic and fiscal prosperity. The short-term gains are substantial, but the lasting and real reward for future generations is the opportunity for Newfoundland and Labrador to become a more prosperous province no longer dependent on Equalization. It was against this backdrop that I made the commitment last June and since then, through my Ministers, I tabled a federal offer which fully respects that undertaking.

We are both aware that the province already receives 100 per cent of the revenues flowing from offshore production. Existing provisions in the Atlantic Accord ensure that the province will receive all of these revenues over the full life of offshore petroleum production. In this respect, Newfoundland and Labrador’s offshore resources are already treated in the same way as if they were onshore. Our discussions have always been about the impacts of increased offshore revenues on Newfoundland and Labrador’s Equalization payments.

For other provinces, Equalization usually declines by one dollar for each dollar increase in own-source revenues, but this is not the case for Newfoundland and Labrador’s offshore revenues due to the Accord. However, the problem is that under the terms of the Accord, the protection Newfoundland and Labrador receives will decline to less than 100 per cent between now and the end of the offset provisions in the Atlantic Accord, that is up to 2011. This would mean a loss of revenues for Newfoundland and Labrador while the province is still in receipt of Equalization. That is the issue I wanted to tackle in our discussions in June. In short, my commitment was that as long as the province was in Equalization, and for the duration of the Accord’s offset provisions, your province would receive 100 per cent protection against declines in Equalization as a result of the province’s receipt of offshore resource revenues.

In this context, the offer the Government of Canada has put on the table delivers exactly what I committed to in June. It confirms the guarantee that Newfoundland and Labrador will receive 100 per cent of revenues from its offshore oil and gas production. It provides the new guarantee that as long as Newfoundland and Labrador is in Equalization, it will receive 100 per cent protection from declines in Equalization flowing from these revenues for the period of the offset provisions in the Accord. In addition, we are retaining all of the existing benefits of the Accord. This entirely honours my 100 per cent commitment and will provide considerable additional payments to the province. Indeed, based on your own price and production forecasts, it could represent an additional $2.6 billion between today and 2012 over the benefits you currently receive from the Accord. This is also over and above the significantly increased benefits of the new Equalization framework agreed to in October.

My approach to a new arrangement for the treatment of Newfoundland and Labrador’s offshore revenues has been guided by two fundamental principles. First, I am committed to providing needed financial support to Newfoundland and Labrador in recognition of the unique economic and fiscal challenges your province faces. Second, any arrangement worked out with Newfoundland and Labrador to provide new assistance with respect to the offshore has to be undertaken in the context of ensuring fairness for all Canadians. Since the Atlantic Accord was originally signed over 20 years ago, I am the first Prime Minister that has been willing to make such a commitment to your province and I have honoured it in the proposal that we have provided.

Since June, you have raised additional issues. One of them is that while the Accord’s offset provisions end in 2011, you want the clawback protection to continue. You expressed concern that the duration of the agreement would be too short to address the difficult fiscal situation that you face, a situation unique to Newfoundland and Labrador. This was not part of our agreement in June, but I have indicated that we are prepared to consider an extension of offset payments to 2020. You acknowledged in discussions with Minister Goodale that, in order for an extension to be fair to the rest of the country, continuation of offset payments should be linked to fiscal indicators. As our Deputy Minister of Finance stated to you in Winnipeg during the discussions, “we are open to consider indicators that work for Newfoundland and Labrador”.

You also raised the issue of enhanced protection if Newfoundland and Labrador went off Equalization within the next eight years. This was not something that we discussed last June. The fact is that the existing Accord already provides for unique and generous benefits even if the province no longer qualifies for Equalization, ensuring that the offset payments are at least 85 per cent of those in the previous year. The existing benefits under the Accord will thus provide for substantial payments well after the province is no longer eligible for Equalization. Therefore, any assertion that Newfoundland and Labrador would “fall off a cliff” once it becomes a “have” province is not correct.

This last issue has emerged as the fundamental point of difference in our discussions. You now are asking the Government of Canada to make additional and continuing 100 per cent offset payments even if the province no longer qualifies for Equalization. This would mean that Newfoundland and Labrador would be out of Equalization because of the strength of its own revenues, thus meeting the key objective of the Accord, but continue to receive additional offset payments, in practice indistinguishable from Equalization payments, from the Government of Canada. This is inconsistent with your public statements, for instance “once we get to the equalization standard, we are saying we don’t want any more equalization. All we want after that, forever, is 100 per cent of our provincial revenues, no different to Alberta or anyone else” (G&M, A1, Nov. 18).

Let me close in saying that I have approached our discussions in good faith, as have my Ministers and officials. The proposal we put forward honours the commitment I made to the residents of Newfoundland and Labrador. We have consistently, over the past months, shown flexibility in our negotiations with you.

Of course, I am prepared to meet with you. Ministers Goodale and Efford will continue to lead discussions with your representatives. I have asked them to respond to the specific technical points raised in your letter.

I look forward to further discussions between the Governments of Canada and Newfoundland and Labrador to arrive at an agreement on new offshore arrangements.