05 January 2005

The Winnipeg Offer

The federal government has made two offers which were made public subsequent to their being presented. Following is the offer made in Winnipeg in late December 2004; as I understand it, there were some discussions that are not reflected in this proposal.

What follows is a straightforward presentation of the offer, with some commentary on its contents, particularly as it relates to the provincial government position. Undoubtedly more of the province's reaction will be released later today and I will update my comments accordingly.

Draft Agreement in Principle
Between the Government of Canada
and the Government of Newfoundland and Labrador
and the Government of Nova Scotia

1. This agreement reflects an understanding between the Government of Canada and the Government of Newfoundland and Labrador and the Government of Nova Scotia that:

· both provinces already are collecting and will continue to collect 100 per cent of offshore resource revenues as if these resources were on land;

· the Government of Canada has agreed to provide additional offset payments to these provinces in respect of offshore-related Equalization reductions.
Comment: This clause is a simple statement that reflects the current situations with respect to Nova Scotia and Newfoundland and Labrador offshore revenues. The second bullet point describes the current agreement.
Based on Premier Williams post-June 10 position he could not accept either of these points. First, he has argued that the province currently does not receive 100% of revenues and therefore he could not endorse a comment that states otherwise. Second, the Premier has also claimed that the additional federal transfer is not an offset payment related to Equalization.

2. The Government of Canada intends to execute its commitments under this agreement through legislation that will authorize additional payments to provide 100 per cent offset against reductions in Equalization payments resulting from offshore revenues.

Comment: This is a further statement of the federal government's intent and the general nature of the agreement.

3. For the fiscal year 2004-05, the value of the additional offset payments will be:

a. For Newfoundland and Labrador: $133.6 million;

b. For Nova Scotia: $30.5 million.

4. For the fiscal year 2005-06, the value of the additional offset payments will

a. For Newfoundland and Labrador: $188.7 million;

b. For Nova Scotia: $26.6 million.
Comment: No explanation has been offered as to why the federal government proposed specific amounts for payments in the first two fiscal years of the agreement that differ from the rest of the agreement. In FY 2004, for example, the amount of $133.6 is approximately equal to projected offshore royalties used to prepare the FY 2004 budget. However, actual revenues as defined even by the pre-June 05 provincial position would be closer to $300 million based on current projections. Even allowing that this figure is intended to represent the 70% of revenues used to calculate Equalization, the figure is still slightly off.
Nonetheless, there is nothing to suggest these figures could not have been revised upward to reflect actual performance or that the two fiscal years could not be brought under Clause 5.

5. Commencing in 2006-07, the annual offset payment for each province shall be equal to 100 per cent of any reductions in Equalization payments resulting from offshore revenues. The amount of additional offset payment shall be calculated as the difference between the Equalization payment to be received by the province under the Equalization formula as it exists at that time if the province received no offshore petroleum resource revenues in that year, and the Equalization payment for that province in that year under the Equalization formula as it exists at the time, net of any payments made with respect to existing accords or Equalization offset provisions.
Comment: This clause describes the formula for determining the amount of the additional transfer to be made by the Government of Canada. It is a robust description of the offset as being the difference between Equalization with oil revenues included and Equalization without oil revenues.

6. For 2006-07 to 2011-12, in any fiscal year, if either province no longer qualifies for receipt of an Equalization payment, no additional offset payments will be made to that province, beyond payments specified in existing accords.
Comment: This is the clause that would cause the provincial government the most concern. Under this clause, additional payments to the Government of Newfoundland and Labrador would cease in three to five years when the provincial government own source revenues exceed the national per capita average fiscal capacity to qualify for Equalization transfers. in other words, since the province has only three years to go before it achieves "have" status, the duration of the agreement is functionally limited. We are making too much money.
This clause would ensure Newfoundland and Labrador is treated consistently with other provinces across the country. It is also consistent with the principles established in the Atlantic Accord on revenue sharing and on Equalization. The clause also conforms to Premier Williams desire that offshore resources "from a revenue perspective be treated as if they were on land within this province". [Williams to Martin, May 21, 2004.]
7. This arrangement will be in effect until March 31, 2012. No later than March 31, 2011, Canada and each province will, on a bilateral basis, begin discussions to determine whether a successor arrangement with each province should be put into place for an additional 8-year period beyond 2012. There will be no further arrangements for a province beyond March 31, 2012, if that province has not attained budget balance in 2011-12 or has not qualified for Equalization payments in 2010-11 and 2011-12.
Comment: This clause provides conditions for triggering the second eight years of additional federal transfers. It requires that a province must either have balanced its budget on an accrual basis or be receiving Equalization in 2011-2012.
There are two obvious points for comment. First, Newfoundland and Labrador would not qualify for a second period of eight years if current projections hold and it becomes a "have" province within three to five years (2007 to 2009). Second, the Williams administration has already committed to balancing the province's budget on a cash basis by 2008 and on an accrual basis by 2011/2012. This stipulation should not cause significant concern for the provincial government since it conforms to their established policy commitment.
8. Any successor arrangement with a province would be in effect for the period 2012-13 to 2019-20. In any year in that period, offset payments would be subject to the following conditions: the province would have to maintain budget balance in that year, the province would need to have qualified for Equalization payments in that year or the preceding year, and the province's debt-to-GDP ratio (using a fully consolidated accrual basis of accounting) has not become lower than that of one of the provinces that is not a party to this agreement. The arrangement would expire once payments are terminated for any year.
Comment: This section establishes certain conditions for the second eight-year transfer period. It essentially reinforces the goal of having the additional federal transfer being applied to reduce provincial debt and deficit. As such, it conforms to the Williams administrations' election commitment.
9. The Government of Canada commits to providing new offset payments for an additional 8-year period, starting with the first fiscal year of offshore commercial production, if any, from the Deep Panuke project in Nova Scotia or the Hebron project in Newfoundland and Labrador. Any such additional offset payments shall be limited to the revenues from these projects.
Comment: This clause introduces a new concept, namely separate offset mechanisms for specific projects. It overcomes one of the flaws in the original Accord which was not sensitive to protracted development phases. Essentially, Newfoundland and Labrador's offset was triggered by Hibernia production alone. Had the other fields remained undeveloped for an extended period, the offsets would have applied solely to that field; once developed the provincial government would have only received 100% of revenues from the fields with no additional federal transfers.
Rather than causing concern, this clause should be viewed as a positive step forward in the development of talks between the provinces and the federal government. A relatively straightforward amendment could bring any future, and currently unforeseen, projects under a similar special offset provision.

10. The Government of Canada agrees that if, in the future, it enters into an arrangement with another province or territory concerning offshore petroleum resource revenues, then either province may elect to enter into discussions with the Government of Canada to amend this agreement.
Comment: This clause extends to Newfoundland and Labrador a protection already available to Nova Scotia through its offshore oil agreement with the federal government.