27 March 2020

Facing the financial wall, again #nlpoli

Newfoundland and Labrador Hydro makes money by making and selling electricity. In 2018, the last year for which we have statistics,  Hydro made about 40 gigawatt hours of electricity and sold it for slightly less than a billion dollars. Most of the electricity went to Quebec and most of the money came from Newfoundland and Labrador.

On Thursday,  the House of Assembly gave Hydro permission to borrow $500 million in 2020 to cover losses from sales.  “Anticipated reduction in revenue during the pandemic” is the way NTV’s Michael Connors described it on Twitter.

That’s half Nalcor’s income.

No one explained on Thursday during the pantomime session of the legislature why anyone expected that half of Hydro’s business would disappear during April, May, and June.  No one nows if they will lose money,  natural resources minister Siobhan Coady said in the House.  This just allows them money if they need it.

Government doesn’t really expect the emergency to last beyond June, in all likelihood. Health minister John Haggie gave that estimate in the daily briefing on Covid-19 while a handful of his colleagues were in the House dancing through the superficial proceedings.

We should notice the size of this Nalcor debt because it is the first time government raised the limit of Hydro’s debt since 2007.  Hydro’s debt is current only about $1.9 billion so with the debt ceiling raised Hydro can borrow about $800 million for whatever reason the Crown corporation might need cash.

So all things considered, let us call this gigantic amount of borrowing suspicious.

While you are at it, notice that the House also approved a bill to let the government to borrow $2.0 billion stating on April Fool’s Day.  The money is about what those watching the government’s spending figured it would need to make ends meet in the 2020 budget.

The problem is, no one outside government has seen the 2020 budget yet.  We only have supply bills covering half the fiscal year.  They total about $4.7 billion, give or take across three bills - Interim 1 amended to be about $2.6 billion, Interim 2, and Interim 3 - approved in the past three weeks.

All told, the House approved $4.7 billion in spending and – in effect – a total of $2.8 billion in new debt for the government and its major Crown corporation.  The new debt is equal to 60% of the spending for half a year. 

We do not know if the $2.8 billion is all the government will need for the year or not. Finance minister Tom Osborne wouldn't even try to estimate the deficit for reporters.  If it is, and assuming the total spending is roughly the same as last year - $8.0 billion – then borrowing will cover 35% of total spending in 2020.  

This is a sign of just how bad a state the province's finances are in after a decade of chronic overspending and no significant action by government to change.  In the daily media briefing on Thursday,  Premier Dwight Ball got a question about borrowing but he side-stepped it as he has all week by referring only to the House bill, not the actual ability to raise money in the markets.

You see, the House of Assembly can approve borrowing all it wants but the real test of the government’s financial position is its ability to actually get someone to buy its bonds, treasury bills and other forms of debt.  In late 2015,  the provincial government had a hard time making payroll because the markets tightened up for about a six month period.

 Ball mentioned the Bank of Canada’s PMMP in answer to the question on Thursday, referring to it as a credit facility. But the Bank’s new program isn’t a credit facility, as such.  It is a program available to all provinces and covers a specific kind of debt: treasury bills and promissory notes with a term of less than 12 months.  There’s nothing in it to cover the long-term debt that would make up the bulk of that $2.8 billion.

Ball didn’t misspeak. He actually started to answer the question, stopped, backed up, and went down a different path to the one he started on. The whole thing looked like the time last year when Ball talked about a higher number for the provincial deficit than the one in the budget.  The finance department blew it off as a slip of the tongue but it is pretty clear he was referring to a different way of accounting for some government spending.  The number he used was almost exactly the deficit number assessed by Moody’s as it warned that the government could not carry on spending the way it is for very much longer.

So if Dwight Ball didn’t misspeak when he said “credit facility”,  we must wonder what other announcements are coming or what other arrangements are in the works to help the province find the money to cover its operating costs and, on top of that, cope with impact of Covid-19 on the provincial government’s finances.

Tom Osborne used to say we were facing a wall in 2015 but thanks to the way he and Dwight Ball have run things, we had moved back from it.

Apparently not.