Dundernomics 101: Dazed and confused

There’s a Tellytorial  - editorial at the Telly – that is worth reading if you missed it already.

It’s the one from last Saturday that began by noting that the Conservatives are ploughing ahead with the Muskrat Falls project because they got a mandate for it in 2007.

Missed that little gem from four years ago, didn’t you?  As the Telegram notes, you surely aren’t alone.

Then there’s the bit where Premier Kathy Dunderdale says she’s confident an external “audit” and the public utilities board will back up claims that she and the Nalcor brass are making about the project.  No surprise there:  the audit isn’t really an audit, the utilities board has been given basically set up to deliver what Nalcor wants it to deliver and neither will examine the assumptions on which Dunderdale and her predecessor – Danny Williams – gave the green light for ramping up the public debt.  The fix, as they say, is in.

But the part of the editorial likely to really make you uncomfortable is the bit where the Telegram editorialist notes that Dunderdale is full steam ahead on the megadebt project yet at the same time:

in one part of the meeting, Dunderdale said governments across the country are getting stung by all manner of projects coming in vastly over budget — often by as much as a third or a half again as much as original budgets had outlined. At the same time, she argued that a contingency plan built into the Muskrat Falls project would handle any overages, even though the contingency set aside for the project is only 15 per cent of the project’s cost.

That’s pretty much what your humble e-scribbler has been saying about these sorts of projects in other parts of the world and about the administration Dunderdale’s been a part of since 2003.

The current provincial administration is routinely over budget and behind schedule on everything it does. The latest example is a plan to build a bunch of new ferries for the provincial coastal service. Already years behind schedule, the current administration torqued everything related to the launch of the first two hulls of a planned series to update the aged fleet. Turns out, though, that the project is not only years behind schedule, it is also significantly over budget such that it is causing problems for the remainder of the program.  People didn’t find this out – by the way – until human resources minister Darin King spoke to CBC’s David Cochrane last week about  labour problems at the Marystown shipyard.

Flip back to the Muskrat project though.

Current estimate for the project is $6.2 billion.  Increase that by 50%,  the likely over-run given Dunderdale’s comments to the editorial and experience with the current Conservative administration. You are already at about $10 billion and that’s roughly the size of the provincial government’s current liabilities.

Consider, though that the estimate of $6.2 billion isn’t realistic in the first place.  Nalcor and the provincial government are basically citing figures for 2011 that are exactly the same as ones first floated in the late 1990s.  Put a bit of inflation on that number at you’d be at $10 billion or more as a realistic starting figure.

Now add 50% and see what you get.

Scary, isn’t it?

When you are done with that and your breathing returns to normal, notice that Kathy Dunderdale acknowledged to the Telegram editorial board that these sorts of projects tend to go over-budget by up to 50%.  Your humble e-scribbler has been saying that for years.  others have said the same thing.

So… the Premier and critics of the project agree on both the likelihood of over-runs and how bad they’ll be.

Then recall this Dunderdale quote from a recent speech:

May I suggest you look at the motives of the few vocal naysayers who are working so hard to find flaws in what is easily one of the most exciting developments in North America.

Maybe you should.

And while you are at it, look at Dunderdale’s motives in pushing the megadebt project despite the very obvious and massive flaws in her proposal that even she acknowledges.

If you look at both, it should be pretty easily to see who is dazed and confused and who thinks there’s a better deal waiting to be had than the one the Premier and her supporters are flogging.

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Dundernomics 101: the promise of problems ahead

Take a look at this picture. 

It comes from Wade Locke’s presentation at a conference of the province’s credit unions in Gander in the latter part of May.

The blue line is government income (revenue).  The red line is government spending (expenditure).

When the blue lie is above the red line, you have a surplus.  When the red line is above the blue line you have a deficit.  The distance between the blue and the red line is the size of the surplus or deficit in any given year.

Let’s zoom in on the last bit there because it shows a period where government spending is going to outstrip income in every single year.  yes, despite being a have province and pulling in billions in oil money every year, the current administration is forecast to rack up the public debt by plain, old-fashioned overspending.

Now there are a couple of things to note here. 

First of all, Locke is allowing for constant spending.  As he notes in the text under the slide, it is actually different from the provincial government version that claims a drop in spending three years out.

Given that the current budget shows a sizeable increase in spending you can safely forecast a five percent increase in annual government spending in every single one of those years.  That’s actually much less than what the Tories have done since 2003 but let’s be  - no pun intended – conservative in our forecast of their overspending.

Second of all, let’s look at Locke’s explanation for this problem:  “growth in oil royalties does not offset loss of $540 million in Atlantic Accord monies in 2011-2012” 

There are two words for this:  pure crap.  In more polite terms, this is where Locke’s economics proves woefully unable to contend with a  fundamental problem in government policy. His comments, as a result, are simplistic in the extreme and – at the very best – misleading. 

What you have here – in simplest terms – is a government that has no control whatsoever over public spending.  The reason spending outstrips income is because the provincial government lacks a policy that would allow it to establish spending priorities and to stick with them.

What’s more, those big blue spikes there in the middle and the surpluses they represent are purely accidental.  The only reason they exist is because the money flooded in so fast that the finance ministry ran out of places to spend the money during the year.

Sound fiscal management – spending public money wisely – is the most fundamental responsibility that a responsible government has.  If a government doesn’t control spending it can wind up, in the extreme, in the situation newfoundland found itself in the early 1930s.

All Locke does here is offer an excuse by trying to shift responsibility from the government responsible for the mess to one that isn’t. What’s more, even if the federal government agreed to continue sending $500 million annually to St. John’s any provincial government that cannot control public spending will always be running up deficits.

What is truly chilling in this slide is that last bit.  It ends in 2017, the same year the current administration forecasts it will have finished building the multi-billion dollar Muskrat Falls project. 

Locke has a good chart of the debt over the next six years.  What you have to realise is that he is basing it, apparently, just on the growing deficits on annual spending.  Locke rightly notes that any changes in spending or in oil prices will make the deficit in any one year bigger or smaller than he has shown it.

If you can’t pick out the numbers there, the last one is $10.5 billion.  That’s the same number it was in 2003 when the provincial Conservatives took power.  And as Locke notes, things don;t get better after that point.

Things also aren’t really going to be as rosy as those numbers might appear to some.  Locke left out – apparently – the debt resulting from the Muskrat Falls project. 

Conservatively, you can add another $5.0 billion to that figure.  That’s because the $6.0 billion the Dunderdale crowd say that Muskrat will cost is laughably low.  It will likely wind up costing closer to $10 billion than not.  Even if they can somehow use cash reserves or other money to keep the borrowing down, the provincial government and Nalcor won’t be able to avoid borrowing about half of the total cost of the project.

And if all that doesn’t leave you cold, just remember that Wade Locke usually makes comments that pout the current provincial administration in the best light possible.  The fact he delivered a talk recently that suggests there are serious problems is a sign things are nowhere near as rosy as some would have you believe.

There are problems ahead.

Serious problems.

The current administration helped create the problems.

They have no intention, let alone a plan, to deal with the problems.

That is Dundernomics at work.

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Dundernomics 101: All your toasters are belong to us

labradore does yet another fine job exposing the completely ludicrous claims of those backing Kathy Dunderdale’s Empire of Debt, doing business as the Muskrat Falls project.

Specifically, labradore tackles the idea that electricity demand in the province is growing such that the only sensible alternative to the current situation is to build this super expensive project and force local ratepayers to pay the full freight for it.  Excess power – and there’ll be lots of it – would be sold outside the province at huge discounts, courtesy of the fine folks in what noob Bloc MP Ryan Cleary calls Newfoundland Labrador. 

There are no conjunctions in his world-view apparently.

In any event, labradore offers up two charts compiled from official government figures.  They show energy demand in two different ways.

See if you can spot a growth in demand.

Unlike Nalcor’s open house propaganda sessions, there won’t be a hundred bucks as a door prize for showing up to this little exercise. 

You could, however save yourself from doubling your own electricity rates so other people can profit by Kathy Dunderdale’s folly.

Oh and to understand the title you have to read the quote from Hansard over at labradore.  make sure you turn away from the screen when you do the spit-take.  no need to get the computer all mucked up.

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Dundernomics 101: the cost of doing business

Premier Kathy Dunderdale, displaying her keen awareness of mathematics – among other things -  in the House of Assembly on Monday, May 9:

Mr. Speaker, Hebron costs are driven by reserves, as are most projects in the offshore. So as we do our delineation work and we find out exactly how much oil is there, then capital costs increase or decrease accordingly.

Mr. Speaker, as a result of this work on Hebron, reserves have gone up by 11 per cent. Our costs in capital construction have increased from $360 million to $480 million, Mr. Speaker, and it will also mean an increase of over 50 per cent to the Treasury of Newfoundland and Labrador in royalties and benefits.

Erm.

Not exactly.

Finding more oil in a field doesn’t necessarily increase the capital costs up front.  At Hibernia, for example, the capital costs didn’t jump as they found more and more oil.  The reason is that they could pump the oil out of the ground by drilling wells from the GBS or by using another cheap method.

Operating costs will change, of course.  That’s because they will have to run the production facility in order to get the oil out of the ground.  But day-to-day costs of keeping the wells going is not the same as capital cost, as in construction costs for new facilities to get the oil out of the ground.

In this case, it seems that the Hebron partners have decided to exploit this new oil with tie backs. Odds are that this new oil is some of the light sweet crude in the field. That stuff is easier to get at than the heavier stuff that comprises most of the oil at Hebron.  Plus it also commands a higher price for the crude and yields more reined products out the other end of the refinery.

Tie-backs are essentially pipes that run along the seabed.  They are a relatively cheap way to pump oil since you are not building a new ship or gravity structure to get at the oil.  Instead you just run these giant straws from the existing platform out to the oil.  Bob’s yer uncle.

So this idea that more oil drives up capital costs is just whack.

Then there is the math on the jump in costs.

Used to be the share of costs for Nalcor was $360 million.  Now it is $480 million. That is not an 11% increase.

That’s a 33% jump.

Curious.

Curiouser, it becomes when you realise that while the House of Assembly was closed for a lengthy Easter break, the public found out that costs for the Hebron project had jumped by not 11% or 33% but 66%. 

From $5.0 billion to $8.3 billion.

Something does not add up here.

And it really does not add up when you look at the Premier’s claim that the provincial government’s royalties and benefits will jump by more than 50% as a result of an 11% increase in the oil reserves.

Let’s put some hard numbers on this. 

Let’s say, for argument sake, that the total amount of oil in the field was originally supposed to be 500 million barrels.

An 11% increase would give you a new total of 55 million barrels more oil.

According to the Premier, it cost $360 million for the province’s share of getting the 500 million barrels out of the ground. Finding 55 million more barrels didn’t lower the cost overall or the cost per barrel.  According to Kathy Dunderdale that small amount of oil will cost  - relatively speaking  - more than twice as much per barrel as the original oil.

That’s not a very attractive prospect.  The more oil you find, the more expensive each new chunk takes to produce it.  In fact, it makes no sense to keep finding more oil at Hebron if that is the case.  It won’t take too long before you have boosted costs to the point where the project would never be profitable.

Ah-ha sez you.

But those tiny extra amounts of oil actually produce more profit than the entire Hebron field.

After all, that’s what Kathy Dunderdale said and, Pakled that she is, Kathy is smart.

So it must be true.

Yeah, well, no.

What Kathy said was that this 11% more oil, the stuff that costs twice as much per unit to produce will actually return to the public treasury 50% more royalty and benefits.

To quote a famous politician, nothing could be further from the truth.

Simply put, royalty is a function of the quantity of oil, the price per barrel and the cost of getting it out of the ground. 

Let’s say that those original $500 million barrels produced royalty for the province of $500 million dollars.  According to Dunderdale, the 55 million new barrels would produce more than $250 million or roughly five times the return per barrel of any other barrel of oil.

Theoretically that could happen if the 55 million barrels were somehow handled differently than any other.  But they aren’t.  They are all barrels of oil sold at the same time as others for the same price and under the same royalty regime.

Clear?

Between you and Kathy Dunderdale that makes one of you.

That concludes today’s lesson in Dundernomics.

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Dundernomics 101: how to lose money

In the House of Assembly on Tuesday, Premier Kathy Dunderdale displayed her keen insight into the intricacies of public finance and economics:

We are in the open market and in the spot market and sometimes we sell high and sometimes we sell low. What we need to ensure, Mr. Speaker, is that on average we are doing as well or better than we were selling the power to Hydro-Québec, which has always been their plan.

Ummm.

Yeah.

Well, no.

Not unless you are a complete moron, of course.

There’s just no polite way to say it.

The important thing is to make sure the price you get for the power is averaging more than the cost of producing the power in the first place. 

If the power costs a dollar to make and you are selling in any market – the spot market or to Hydro-Quebec  - for less than a dollar you are losing money.

Losing money is a bad thing at the best of times.  If you are talking about losing billions and billions and billions of oil dollars that belong not to you but to the poor benighted people of Flower Hill and Flower’s Cove then it is something way out beyond the baddest sort of bad that there is. 

And if you are talking that sort of complete shite with the legacy of Sprung and Churchill Falls and all the other bad ideas borne of the same sorts of fundamental ignorance you just displayed, then you should not be allowed to balance your own personal cheque-book let alone run the province. 

It is that frickin’ simple.

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Speaker Dunderbunny shows his bias again

Roger Fitzgerald is undoubtedly one of the most incompetent Speakers ever to hold office in the House of Assembly.

He is also one of the blatantly biased Speakers to hold the chair.

That’s saying something given his chief rival for the ignominious historical achievement is his predecessor, the pompous, biased and incompetent Speaker Harvey Hodder.

As if his bias an incompetence weren’t enough, Fitzgerald displayed naked contempt for parliamentary practice recently by turning up at not one but two partisan events. 

He showed up at a Conservative nominating meeting during the recent federal election.  Not content with that bit of churlishness, anyone attending the recent provincial Conservative coronation for Kathy Dunderdale could see Fitzgerald hanging out with his buds.

Fitzgerald proved his bias and incompetence again on Tuesday with an unprompted ruling that a word was unparliamentary.

Here’s the way Hansard recorded his intervention during a session when his patron, the Premier, got increasingly hot under the collar over questions about why she is trying to hide aspects of the Muskrat falls deal from public scrutiny:

There has been language used in the last two days in Question Period by the hon. the Leader of the Opposition which is clearly unparliamentary when she references a certain type of economics and references a member’s name describing that process.

I ask the hon. member, that in the future if she would be kind enough not to be using unparliamentary language and reference her questions in a different way.

The word Roger didn’t like was “dundernomics.”

Opposition leader Yvonne Jones used it exactly once during question Period on Tuesday.

The facts are recorded in Hansard and as such, it is an unquestionably accurate rendering of the proceedings. The House of Assembly, like all Westminster style parliaments, has judged it so.

To be fair to the Speaker, there is no defined list if what words one can or cannot use in the House. Parliamentary practice in Canada, though, holds that unparliamentary language means the:

use of offensive, provocative or threatening language in the House is strictly forbidden. Personal attacks, insults and obscene language or words are not in order.

Dundernomics is not obviously in any of those categories.

The word – used just once, you will recall – did not disrupt proceedings or increase the heated temperatures in the chamber, the sort of result one might expect to bring a Speaker’s intervention.

And Fitzgerald certainly couldn’t object – as he apparently did – because the word uses the name of a member of the House.  As others have pointed out, Fitzgerald stayed rooted in his spot for years as Tory after Tory after Tory violated the century old (at least) parliamentary tradition to mention a certain member by name and to praise every portion of his anatomy as if he embodied the second coming of the Divine One.

Fitzgerald’s continued presence in the chair is an insult each day to the people of Newfoundland and Labrador.  His performance is an ongoing display of contempt for parliamentary democracy.

 

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