Norsk Hydro ponders production cut

Norwegian aluminium giant Norsk Hydro is considering a cut in its existing production in light of a dramatic global drop in demand for aluminium and aluminium products.

Norsk Hydro said the crisis has led to "substantial problems for the construction and automotive industries, which are among the metal industry's most important markets".

"This has again triggered a dramatic decline in demand for aluminium products," added Hydro, which has in past years restructured its aluminium products business, including exiting numerous less profitable automotive parts ventures.

So much for that big announcement in Labrador about a new smelter.

So much too for the idea that growth in China and India would offset any American downturn in the markets.

“The industries, economies are now in serious pain through the world,” said Stephen Briggs, analyst at RBS Global Banking & Markets.

“Everybody – even the most bullish people – have now given up on the decoupling idea,” Mr. Briggs said, referring to the argument that China was making up for any demand slowdown in the United States.

-srbp-

The return of The Can-Opener

Memorial University economist Wade Locke is back in the news and, not surprisingly he is saying things the provincial government will love.

Like his view of oil prices and the chances for a budget surplus bigger than the one forecast:

"The price of oil has already averaged in excess of $110, $115 per barrel for the year so far, so even if the prices were to fall down to $10 per barrel, they would still meet their budget projections of $87 a barrel," Locke told CBC News on Monday.

"So the forecasts in the budget should still be fine. They should have a budget surplus even bigger than they what they had forecast."

Perhaps Wade would like to actually, you know, read the budget estimates and see what the budget says about oil averaging 87 bucks a barrel and surpluses.

Wade also believes that the world has changed fundamentally - high demand and no new supply - such that oil will sell above US$90 a barrel way out into the future.  In the short-term, - up to two years, according to Locke - they might dip but the long-term price will be high, higher and highest. Asked if he thought oil prices would go to  ten bucks a barrel, Locke gave an emphatic "no". 

Like we haven't heard that one being forecast before, based on the change in market fundamentals yada yada yada. There's likely tape somewhere of an economist telling us that there was absolutely no way oil would fall to $10 a barrel again;  that would be right before it went to 12 and then eight bucks.

Uh huh.

Even the Lower Churchill will go ahead, completely unscathed by the tightening of world capital markets. No problems there at all.  The future is bright, as Locke says.

Maybe someone should fire off a proposal to Trevor for some government cash to build a shades factory.  Not Raybans or anything pedestrian but some unique NewfoundlandLabrador brand of sunglasses to keep the unique sun out of our unique as we go around under this amazing bubble of economic protection that evidently surrounds us. 

Other places are falling victim to the global crisis but not here.

Economics is truly a dismal science. Aside from stating the obvious - that things will be unsettled in the next year or two - the rest of what Locke said was ultimately about as useful as something we'd get from Aline Chretien's confidant and her psychic alliance. No shame in that:  none of us can predict the future with any accuracy.  When we do get close it is often due more to blind luck than any insight or foresight.

Maybe to give a sense of Locke's analysis in the past though, perhaps we'll go back to his view of the Atlantic Accord when Danny was in full fight and Wade's view after the deal was inked.

Wee bit different.

But hey, at least we now know who Danny Williams turns to for economic advice and has been probably turning to for advice for some time.

Turns out it wasn't Sarah Palin after all.

-srbp-

Gimme your lunch money, dork: the sequel

That $10 billion Equalization debt thingy is curious, dontchya think? The Premier and his followers bandy it about like it was fact.

Where did it come from?

Wade Locke. Well, at least one set of assessments done by the Memorial University economist.

Funny thing, though, if you look way back to last June, you'll find a study Locke did for the Atlantic Provinces Economic Council (APEC), along with a buddy of his, Paul Hobson, an economist from Acadia. Hobson, incidentally proposed a totally different approach to the treatment of resource revenues, one that went completely unnoticed in all the fooferah over the past couple of years.

Anyway, Hobson and Locke, point out that all four Atlantic provinces are adversely affected by the new Equalization formula:

Nova Scotia - $159 million increase in revenues for the first two years under the new Equalization program, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $1.4 billion less under the new Equalization program than under the Fixed Framework;

New Brunswick - $68 million increase in revenues for the first two years under the new Equalization program, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $1.1 billion less under the new Equalization program than under the Fixed Framework;

Prince Edward Island - $7 million increase in revenues for the first two years under the new Equalization program, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $196 million less under the new Equalization program than under the Fixed
Framework;

Newfoundland and Labrador - $654 million reduction in revenues for the first two years under the new Equalization program, an increase of $22 million in the third year, and reduced revenues in each year thereafter compared with the Fixed Framework: in aggregate, the province receives $1.4 billion less under the new Equalization program than under the Fixed Framework. It should be noted that Newfoundland and Labrador will no longer be a recipient of Equalization after 2008-2009, under both the Fixed Framework and the new Equalization program. [Emphasis added]

Now this was before the Nova Scotia side deal which also works for Newfoundland and Labrador as well. But notice, in particular, the figure for New Brunswick. You see, the lovely province slightly to the west doesn't get much of its own cash from non-renewable resources. The reduced pot of cash involved in the new Equalization system doesn't work quite as well for them as the old way of doing things.

That's not really the whole story though.

Flip back to Ken Boessenkool's 2001 paper for the Atlantic Institute for Market Studies wherein the whole idea of taking non-renewables out of the Equalization calculation was laid out. At that time, the 10 province standard without non-renewables may have only dropped this province's Equalization transfer by a paltry $3.0 million but new Brunswick would have lost over 10 times as much cash and that's just by changing the way the formula was worked out.

The impact of various ideas for Equalization reform was also presented by the O'Brien expert panel. Go back and take a look at that report again since it includes a very good overview of Equalization and the history of the program.

You see, that's one of the things some locals keep forgetting. The Harper Equalization promise wasn't made to just one province. It was party policy across the country, affecting potentially every province. Some provincial governments like Saskatchewan and Newfoundland and Labrador may have thought it was absolutely wonderful. Others? Not quite so enthusiastic.

That's the political situation - painfully and patently obvious at the time of two successive general elections - that makes it seem foolish for any provincial government to have banked on it or even expected it to be politically feasible. No surprise that the federal government went with the expert panel's recommendations and why most provinces have accepted it. The new system isn't perfect, but at least it works. And for provinces like Manitoba and new Brunswick it works considerably better than taking all non-renewable resources out of the formula.

Beyond banking on a completely unrealistic expectation, there's something else in all this some people in Newfoundland and Labrador like to ignore: After 2009, Newfoundland and Labrador won't qualify for Equalization any more under either the new scheme or the old one. As Locke and Hobson note, the provincial government would receive - by their calculation - about $1.4 billion less under the new approach compared to the Fixed Framework.

$1.4 billion.

Where does that figure turn up again?

The Public Accounts, Volume I, note 4 on page 37, released just this week:

The deferred revenue totalling $1,646.2 million consists primarily of $1,458.5 million relating to the Atlantic Accord (2005), which represents the unearned balance of the $2.0 billion advance payment received in 2005-06. In addition, the deferred revenue balance consists of $51.7 million relating to Federal Government funding for various health care initiatives, $44.9 million relating to Federal initiatives in support of post-secondary education, public transit and affordable housing, $16.4 million relating to gas tax initiatives, $62.3 million relating to entities in the education sector, $7.4 million relating to entities in the health sector, and $5.0 million related to other miscellaneous programs. These amounts will be recognized as revenue in the periods in which the revenue recognition criteria have been met. [Emphasis added]

Curious, huh?

It's likely a coincidence, but remember that when the provincial government signed the 2005 transfer deal - it wasn't about offshore oil revenues, by the way - the up front cash was offered and accepted because both the federal and provincial governments knew that, at least for Newfoundland and Labrador, it offered more cash than would be obtained before the province went off Equalization if the thing was just run on a year-to-year basis.

At the time the deal was signed, both public and government estimates were that Newfoundland and Labrador's provincial government fiscal capacity would put it off the top-up scheme called Equalization such that the second eight year phase was unlikely to be realized. As the premier noted at the time the transfer deal was signed, the whole thing came down to a discussion of the cash - the quantum, as he put it - and by simply adjusting the assumed average price of oil, the up front cash went from $1.4 billion from October to $2.0 billion in January 2005.

Poof, the deal was done. Never mind that the principles laid out in the January deal were actually inferior in some respects to the October offer. It was the up front cash that counted.

All of this should be a reminder that provincial governments across the country all look at the federal government as a source of cash. There's nothing new in this at all. The pretexts vary, but the demand is still the same. Danny Williams is looking for $10 billion or so based on what he calls a broken promise. Dalton McGuinty has a figure double that and earlier this month he went looking to Ottawa looking for another $350 million. Just this week, the arch-provincialist party the Bloc Quebecois put $15 billion of demands on the table as its price for supporting Stephen Harper's Conservatives. Saskatchewan is looking for cash, too.

Just to give a real sense of just how much the $10 billion - for example - is merely a pretext for the usual game of federal-provincial relations, look back at the letters Danny Williams sent to Stephen Harper through December and into January. The 'ask', to use Danny Williams sales talk, is the federal shares in Hibernia, which he appears to want for free. Harper doesn't dismiss the subject out of hand, as some local media erroneously reported. rather he clearly leaves the door open to discussion on a purchase price.

But the question that goes begging is why Danny Williams would be prepared to trade off an old demand of his demands in settlement of supposedly new and humiliating grievance of The Broken Promise. If The Broken Promise was both as new and as grievous as the rhetoric would suggest then it could only be genuinely settled with some new compensation.

Not so. And the willingness to trade off - to say yes to less - isn't really a constructive effort to settle an account. Take a look at what else would supposedly settle the grievance and you see a raft of things the provincial government has been seeking for some time or something else that's cropped up lately.

What we have here is old-fashioned federal-provincial relations but reduced to a highly dysfunctional set of confrontations. As noted here before, the entire thing, at least in Newfoundland and Labrador's case, is now structured in a way to frustrate the sort of political discussions that have worked on small and large projects in the past.

But that's not just a function of Danny Williams' style, although his partisans will be quick to leap forward and spew the Blackberry Talking Point du jour. Even in the most intense period of the "Fair Deal" crusade, federal-provincial relations still managed to function. Back room chats, informal exchanges and formal proposals flew back and forth between Ottawa and St. John's. There was a resolution to the major impasse, but there were also other issues that were addressed. Take the offshore board thing as a case in point. The federal and provincial governments engaged in all sorts of discussion out of public view in an effort to resolve the issue. Read the decision in Ruelokke v Newfoundland and Labrador; the evidence is there.

Like the old saying, it takes two to tango and in the current dysfunction in federal-provincial relations it takes two to tangle. The resolution to the problem may well come in the next federal election but it won't because of any ABC campaign by any one politician. You see, just looking at Newfoundland and Labrador, one can see that historically the province tends to vote anything but Conservative, whether we mean the current version of the party or the old Progressive Conservative crowd. There are some compelling reasons in front of the voting public that are likely to reinforce that tendency next time not just locally but across the country.

The old game of "Gimme me your lunch money" won't vanish. That's too entrenched in the federal-provincial system. But there is a possibility that the next federal government will take a different view of how the system should operate, one that restores the sort of political accommodation and compromise that has made Canadian federalism as successful as it has been.

And locally, when the provincial government gets a sense that things are different, well, maybe it will start focusing on those "other things to talk about" everyone has raised lately in the cell phone story. They'll start talking about fiscal responsibility and about the policies needed to sustain the province's new-found status as a major economic engine for the country.

Bullying for lunch money - looking for handouts to pay the bills - is the domain of the insecure and weak. It's time we moved on to something else. Heaven knows the province as a whole is long since past that sort of stuff even if some politicians and their supporters still have an entire forest of chips on their shoulders.

-srbp-

[h/t to Dulse and Fog for the APEC link]

The change Locke found

In Wade Locke's original analysis, he used the assumption that Equalization offsets provided for in the 2005 offshore revenue agreement and enabled by the Nova Scotia and Newfoundland and Labrador Additional Fiscal Equalization Offset Payments Act, S.C. 2005, c. 30, c. 85, would continue as originally intended.

Under that Act as it currently stands, the additional offset is calculated based on the difference between what the provincial government received in Equalization under the formula in use at the time.

The Equalization changes contained in the 2007 budget gave the Government of Newfoundland and Labrador an option of which Equalization formula would apply.

However, s.84 of the budget implementation Act (C-52) makes a significant change to the 2005 implementation Act by imposing a definition of the Equalization system in use at the time to mean the O'Brien formula.

84. The definition “fiscal equalization payment” in section 18 of the Act is replaced by
the following:

“fiscal equalization payment” means (a) for the purposes of section 22, the fiscal equalization payment that would be received by the Province for a fiscal year if the amount of that payment were determined in accordance with section 3.2 of the Federal-Provincial Fiscal Arrangements Act, without regard to section 3.4 of that Act; and,

(b) for the purposes of sections 24 to 26, the fiscal equalization payment that would be received by the Province for a fiscal year under Part I of the Federal-Provincial Fiscal Arrangements Act if the Province’s total per capita fiscal capacity were the amount determined by the formula

A + B + (C / F)

where

A, B, C and F have the same meaning as in the definition "total per capita fiscal capacity" in subsection 3.5(1) of that Act.

As a result, even in a year in which the province used the existing Equalization system (100% of resource revenues included), the additional offsets would be reduced since the O'Brien formula already offsets half of resource revenues.

Additionally, the use of the O'Brien formula, which includes a cap on payments, the proposed changes in the budget implementation legislation would change the meaning of s. 22 of the 2005 implementation Act. Under the current meaning of that legislation, no additional offset payment would be received if the provincial government did not receive an Equalization payment.

In the operation of the Equalization system and the offsets agreements as currently in effect, no payment would be paid if the province did not qualify for Equalization. However, under the O'Brien formula, the province may qualify for Equalization, but receive no payment in years where a combination of all revenues (own source plus Equalization plus Equalization offsets) exceeds the per capita fiscal capacity of the lowest non-recipient province.

Given the amendments contained in Bill C-52, Newfoundland and Labrador would actually receive no offsets at all in any year where its Equalization payment were reduced to zero as a result of the O'Brien cap.

There is no obvious reason for making this change. If the federal government wanted to give effect to both the 2005 agreement and the 2007 budget - allowing for choices - Bill C-52 would necessitate only modest changes, if any, to the implementation acts for 1985 Atlantic Accord and the 2005 agreement.

Wade Locke's latest analysis

Wade Locke has graciously provided his latest news release, which is reproduced below in its entirety:

Updated Estimates of Newfoundland and Labrador Treasury Impacts for the Equalization Options Contained in Budget 2007

Table 1: Updated Estimates Based on Accord Eligibility Criterion Contained in the Budget Implementation Act for the Impacts of the Equalization Options on the NL Treasury from the 2007 Federal Budget - 2007/08 to 2019/20

	Status Quo	50% w Cap (original estimate)	50% w Cap (updated estimate)
Period 2007/08 – 2011/12
Oil Revenue	$7.30 B	$7.30 B	$7.30 B
Accord Payments	$2.51 B	$2.37 B	$1.72 B
Equalization	$0.59 B	$0.76 B	$0.76 B
Combined	$10.40 B	$10.43 B	$9.78 B
Period 2012/13 – 2019/20
Oil Revenue	$7.37 B	$7.37 B	$7.37 B
Accord Payments	$0.0 B	$4.96 B	$0.0 B
Equalization	$0.76 B	$0.0 B	$0.35 B
Combined	$8.13 B	$12.33 B	$7.72 B
Period 2007/08 – 2019/20
Oil Revenue	$14.67 B	$14.67 B	$14.67 B
Accord Payments	$2.51 B	$7.34 B	$1.72 B
Equalization	$1.35 B	$0.76 B	$1.11 B
Combined	$18.53 B	$22.76 B	$17.50 B

On Wednesday, April 4, 2007 at 7:00 pm a presentation was given by Dr. Wade Locke in St. John’s on the estimated impacts for the Newfoundland and Labrador treasury of the equalization options specified in Budget 2007 (Government of Canada). The purpose of this presentation was to provide an objective and unbiased assessment of the net revenue impacts (oil revenue, equalization payments and payments under the Atlantic Accords) for the Newfoundland and Labrador treasury. As well, it is important to appreciate that the intent of the presentation was to provide some clarity to a complicated issue and to facilitate a more focused and informed debate. Moreover, there was a conscious effort in the presentation, and since, to stay away from the politics of this sensitive issue and deal only with the numbers in a professional manner. Although I will continue to do deal with this in a professional, non-political manner, it is my intention that after explaining the contents of this press release to interested individuals, I will have nothing else to say on this particular issue nor will I be undertaking further analysis in this specific area. I will leave it to federal and provincial officials to inform the public.

Given the sensitivity and the emotion surrounding this particular issue, I feel it is important to document how things have evolved to this point. This should enable others to judge the credibility of the approach and the results derived there from.

In any empirical assessment, it is necessary to make assumptions about how elements of each province’s fiscal capacity are expected to evolve over time. The assumptions used in the Locke analysis are clearly specified in the original presentation and interested individuals are referred to www.arts.mun.ca/arts to view the original presentation. While different assumptions will yield different specific results, they are unlikely to change the basic finding listed in Table 1. However, I would encourage both officials in Finance Canada and the Department of Finance, Government of Newfoundland and Labrador to present their own simulations to test the robustness of the results presented above. If this provides more credible information that is appropriately explained and independently vetted, then the public should be in a better position to understand the specific impacts of each of the options on Newfoundland and Labrador. I would encourage both parties to release their own analyses and expose them to public scrutiny as I have done.

The crucial assumption utilized in the original presentation was the eligibility criterion for payments under the Atlantic Accord. Specifically, the original analysis assumed that, under the 50% option, Newfoundland and Labrador qualified for Accord payments so long as it qualified for equalization before the equalization cap was imposed. This assumption was based on the fact that it seemed reasonable to assume that pre-cap equalization was the eligibility criterion because pre-cap equalization was used to calculate the value of the Accord payments. But, more importantly, before finalizing my analysis, I consulted with provincial government officials who confirmed that the pre-cap equalization eligibility criterion was their assumption as well. In addition, I sent emails to two separate officials in Finance Canada on April 1, 2007 requesting clarification on the eligibility criterion to be used for the Accord. Based on the responses that I received from those officials on April 2, 2007, I finalized my assumption about the pre-cap equalization eligibility criterion. In particular, my reading of those emails in the context of the questions asked was that the pre-cap equalization was the appropriate criterion to employ in judging Newfoundland and Labrador’s eligibility for payments under the Atlantic Accord. Without attribution, I have reproduced both the questions and the responses to the emails to allow others to judge the reasonableness of my assumption on eligibility.

The specific questions asked and the responses received were:

Question #1: In calculating the accord under the new arrangement, is it the case that NL receives the accord if it qualifies for equalization on the new arrangement prior to the cap being imposed? In other words, while the cap can remove all equalization payments, but before that happens, the province could qualify to receive equalization pre-cap and as such be eligible to receive the accord. Is that correct?

Response #1: Your assumption is correct; it is the pre-cap equalization amounts that are used in the Accord calculations.

Question #2: In calculating the accord under the new arrangement, it is my interpretation that the province is entitled to receive the accord so long as it qualifies for equalization before the cap is imposed, rather than after. Is that correct?

Response #2: The legislation before the House proposes that under the new arrangement, the test for determining whether or not NL qualifies for the 2005 Accord is whether or not it would receive Equalization payments under the base O’Brien formula – that is, 50% inclusion of resources plus the cap. If it receives EQ under that formula, then the next steps are taken to determine how much. In this case, the offsets are determined before the cap is applied.

On the afternoon of the presentation, at approximately 2:00 pm, I was contacted by telephone by officials from Finance Canada to explain that the eligibility criterion for the Atlantic Accord that was contained the Budget Implementation Act, 2007 was not pre-cap equalization as I had assumed in my presentation. As it turned out, the Budget Implementation Act, which contained relevant legislation on the eligibility criterion for the Accord, was tabled approximately one week prior to my presentation. As explained in a follow-up email at 4:40 pm on Wednesday afternoon, government policy, as outlined in the Budget Implementation Act, specified an eligibility criterion that was different than the pre-cap equalization criterion that was assumed in my presentation. The specific criterion that was identified in that email was:

In effect, NL would be eligible to receive Equalization and offsets as long as long its own-source per capita fiscal capacity (including non-resource yields and 100% of resource revenues) is not equal to or greater than the own-source per capita fiscal capacity of the non-receiving province with the lowest per capita fiscal capacity.

At that point, I had asked for the specific legislation so that I could review it myself. I received it the next day after my presentation and reviewed it on Easter weekend. However, between 4:40 pm (the time of the email) and 7:00 pm (the scheduled start of the presentation) it was impossible to re-analyze the data with the alternate eligibility assumption. Instead, I modified the original presentation to flag the crucial assumption about Accord eligibility. I, as well, indicated in the presentation that if the eligibility assumption was changed, then the estimates under the 50% option would have to be modified, not realizing the extent of the change that would be required.

After reviewing the legislation, it was clear that a new analysis was needed. This was completed on the weekend and sent with an accompanying email to Finance Canada officials on Monday at 5:00 pm NL time and followed-up on Wednesday with a conference call. It was in that call that all remaining technical issues were addressed as Finance Canada officials explained in great detail how the legislation worked. This enabled me to finalize the revised analysis on Thursday for release on Friday, April 12, 2007.

As is clear from Table 1, the impact on net revenues flowing to the provincial treasury, if the 50% option is invoked immediately, is $17.5 B. This is reduced from the $22.8 B estimated previously. The primary reason for the reduction in the estimated impact is that the Accord eligibility standard outlined in the Budget Implementation Act is more stringent than the pre-cap-equalization criterion utilized in the original analysis.

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Economics: the dismal science

Wade Locke has adjusted his assumptions.

Now he says that what was originally a big gain for the province is in fact a loss.

Yes, the 50% exclusion now goes from being a six billion dollar gain for Newfoundland and Labrador over the status quo becomes a one billion net loss.

That's with a change in the assumptions, or more specifically, as CBC's David Cochrane described it, a reading of the budget implementation legislation. He referred to a "stricter" interpretation of what it would take for the province to qualify for Equalization in the future and there
fore how the offshore offsets deals would be affected.

Some quickie observations, before getting Locke's revised views:

1. Economics is a dismal science. After all, if adjusting some assumptions produces a variation of $7.0 billion - your entire Equalization and offsets work, incidentally - then you have some basic problems. Makes you wonder what it would take to have the Danny Williams option turn into a pig.

2. For all the big numbers, remove $14.7 billion. Locke includes offshore revenue in each of projections, for some inexplicable reason. Lop out that specific figure and you'll see the specific effects of Equalization changes and the offsets. That is assuming that Locke's assumptions on any given point are valid. That's not a sarcastic comment; it's a caveat.

3. The cap in the original 2005 deal obviously exists in one way or another. No matter how you look at it the cap built into the original deals - qualifying for Equalization or not - is still active. The real question Locke seems to be grappling with is when that cap cuts in.

4. Yes, there is a cap in the original deal. The offsets only flow as long as the province qualifies for the Equalization hand-out.

And for the record both for Mainland readers and the locals, Danny Williams' original goal in 2004 - not the one he settled for in January 2005 - was for a doubling of oil and gas revenues in perpetuity.

5. The original 2005 deal did not deliver as promised. Said it before. Say it again.

6. Wade Locke still hasn't assessed the other Harper option that still exists, i.e. 100% exclusion of non-renewables with a cap. Too bad Locke is apparently hauling ass out of the debate now that he's stirred it up. Maybe he got some angry phone calls from Florida or wherever the Premier is.

To be complete though, Locke should have assessed that variation since it is on the table.

And if 100% exclusion of non-renewables is such a good idea, then maybe applying the cap is better than what we have now.

At least according to the latest numbers, based on the latest assumptions.

7. Danny Williams had numbers like the ones Locke released initially. On March 26, Danny told CBC radio's Jeff Gilhooley that in all likelihood the province would shift to the 50% exclusion option within a year or two, i.e. by 2009, based on the government's analysis.

Equalization options, by the numbers

The link to Wade Locke's analysis, a Powerpoint slide show. [The link dispappeared.  Here's a text version from the Newfoundland Quarterly]

Read it carefully.

Enjoy all the nice graphs and charts.

This is a goldmine is useful information, including a clear indication that those who seek to poor-mouth the provincial government's revenues are dead wrong.

Update: Here's the cbc.ca story. Unfortunately, the equally solid Telegram article isn't available on line.

-srbp-

Wade Locke: the story running nationally

Here's what Canadian Press is running on Wade Locke's Equalization assessment.

Note the variance from the numbers cited in the earlier post.

In the first try at crunching the numbers, Memorial University economist Wade Locke -- one of the province's leading experts on offshore revenue deals -- has found if Newfoundland were to stick with the Atlantic Accord and the old equalization formula until 2020, it would receive $18.5 billion in combined revenues.

But if the province follows an optimal strategy -- where it would leave the accord in 2009 and opt into a formula where a fiscal cap is implemented and 50 per cent of non-renewable natural resource revenues are included -- it would receive $24.1 billion, Locke said.

While the 100% exclusion might be better, if it is politically impossible, then it really doesn't exist.

On the other hand, the O'Brien approach - trashed by the Premier and others - generates significant extra cash compared to the existing arrangement for Newfoundland and Labrador.

-30-

Locke on Equalization: Prelim views

Memorial University economist Wade Locke released his own assessment of the various Equalization options last night.

Danny-lovers will rush forward to back their man, irrespective of the facts.

The rest of us can approach the whole business a little more insightfully that the local jingoists.

When the presentation is available on line, Bond will link to it and do a more detailed assessment.

In the meantime, here is a thumbnail sketch courtesy of Bill Callahan's synopsis on Night Line and Simon Lono's debrief via telephone. Under the circumstances, details here may be off, so wait for the full report before jumping off a cliff.

1. The old Equalization system with the offshore deals - the one the province still has - will generate approximately $18 billion for the province over a period of time (to 2020 or thereabouts?).

2. If the province opted for the O'Brien formula (50% exclusion of all resource revenues with a cap), then it would gain $22.8 billion over the same period.

3. The Harper option (100% exclusion of non-renewables only) would come out at $28.6 billion over the same period.

A few preliminary observations:

- Danny Williams was dead wrong about O'Brien.

Like stone cold, in the ground, stake through the heart kinda dead wrong.

So wrong, that being wrong any other way would seem right in comparison.

He claimed it was going to cost the province money.

It does the opposite.

Big time opposite.

Makes ya wonder if Danny reads his briefing notes.

Makes ya wonder if he understands his briefing notes.

Makes ya wonder if he just makes stuff up as he goes along.

- 100% non-renewables out is the best of the three options (if you only look at how much cash it nets.). Never mind the fact, that it is politically unattainable. Contrary to Ken Boessenkool's 2001 assessment, this approach actually generates bags of cash for a province like Newfoundland and Labrador.

Again, never mind that it is politically unattainable.

Unreachable.

A pipe dream.

- Danny Williams will claim vindication. His fellow jingoists will now feel their cause is just. The rest of us will wonder why they are out in the cold screaming when what they want is unattainable.

- No one wants to recall that Williams' own policy was for 100% inclusion of all resource revenues.

There's that pesky wrong thing again.

- 100% inclusion plus the offshore offset deals is still a decent option. It generates cash in the bank to the tune of $18 billion. Nothing to sneeze at. All depends on whether you piss it out the door or actually invest money properly.

- Of course, Danny Williams doesn't want to talk about developing a debt management plan right now, i.e. running the province properly. He's too busy getting his mug on TV.

- Locke apparently didn't assess another option in front of the province, namely 100% exclusion of non-renewables with a cap. Forgotten in the Premier's irk-fest is the fact that the Harperites have actually put three different Equalization formulas in play.

- The province hasn't lost anything.

- The province isn't jammed up, as the Premier seems to suggest.

- The province can still play the choice game and come out with significant bags of cash ahead of where it is today.

- Why is Danny Williams persisting in his racket and committing provincial government policy to a partisan row at public expense?

-30-

A fair share of oil and gas revenues

It's the first anniversary of the death of the Hebron negotiations.

Following are three slides from a presentation by Memorial University economist Dr. Wade Locke tackling the question of whether or not the province is getting its "fair share" from oil and gas revenues.

The entire presentation and an article based on the slides can be found at links here.

Figure 1, above, compares the government "take" across several jurisdictions. Locke defines the government "take" as government revenues divided by net cash flows.

Figure 2, above, shows the change in government "take" as oil prices increase per barrel. Note where Newfoundland and Labrador falls in relations to the other jurisdictions, including Alberta.

Figure 3, above, compares net cash flows among the two orders of governments and the companies.

Reading the article and follow the slides one gets a very different impression than the one left by the provincial government on what is involved in the issue of offshore revenues and the provincial government's "fair share".

For example, as noted last year, Premier Danny Williams told the House of Assembly that the 4.9% equity position in Hebron was worth about $1.5 billion over the life of the project, compared to the estimated revenue to the treasury of $8.0 to $10.0 billion over the life of the project.

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Wade Locke on public policy discussions

Part 2 of Geoff Meeker's series on local media reporting of current events includes some prescient comments by Memorial University economist Wade Locke.

Check it out, especially the bit about emotion and logic.

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