Dwight and Tom's legacy: more of the same #nlpoli

Herb Kitchen died last week.

He was the minister of finance in the early 1990s who brought down the difficult budgets, starting in 1991 that were part of a plan that turned the provincial government around.

The deficit at the time was about $300 million and the total budget called for spending of around $3.2 billion. 

Finance minister Tom Osborne announced on Friday that he will need to borrow $3.2 billion to close the gap between what the government will spend (about $8.9 billion, plus more money for Muskrat Falls) and its income.

Officially, Tom Osborne’s deficit of $2.1 billion for 2020 will be 25% of spending compared to less than 10 percent back in Herb’s day.  But if you wanted to compare apples to apples, then we should use that $3.2 billion cash figure, which works out to a deficit three and a half times the size of the one Herb Kitchen brought to the House of Assembly 29 years ago.

Thank God Herb didn't live to see what a mess the provincial deficit will actually be.

Delusion or Disconnect? Managing public land

 

The news release issued from the provincial finance department in response to the latest report by the Auditor General.

“The Williams Government has been unwavering in its commitment to managing provincial programs, services and financial resources in a responsible and prudent manner.”

and

“Sound governance and responsible management have been the cornerstones of how our government runs the affairs of the province and administers programs and services to meet the needs of our residents."

The Auditor General’s latest report on how the provincial government is managing your money:

Part 2.4:  Managing Crown Land.  There are an estimated 9,000 squatters occupying Crown land illegally but there is no regular program of inspection and enforcement to deal with the problem.

There is no inspection of shoreline Crown land to deal with squatting or any other aspect of land management. 

There is also no inspection program for leased or licensed land to ensure the rules are being followed and taxpayer interest  is protected.

Best example of the impact of the failure:  Humber Valley Resort.  There was no inspection at all until the AG started poking around eight years after the Crown lased the first block of land to the now bankrupt resort.

The Branch did not obtain a purchase and sale agreement that was signed by the Corporation and the chalet lot purchaser indicating an agreed upon purchase price, and did not determine the fair market value of the chalet lots in relation to the purchase price as required under the lease. As a result, the Branch could not demonstrate whether the 6% market value premiums paid by the Corporation were appropriate. [Emphasis added]

In other words, the Crown just accepted whatever the resort sent in a cheque without knowing what the sale price of the chalet involved actually was.

The Branch received market value premiums totalling $2.2 million or an average of $31,460 per chalet lot. The Corporation, upon sale of the chalet lots, would have received a total of $37.2 million or an average of $524,390 per chalet lot. As of September 2008, when the Corporation sought bankruptcy protection, the Branch had received three of the five annual lease payments totalling $3.8 million of the total $6.4 million in payments due over the term of the lease.

And when it comes to strategies and plans, the story isn’t any better:

Branch officials could not demonstrate whether the Geomatics
Strategy Implementation Plan developed in 1999 was ever reviewed
and approved by the Steering Committee or presented to Government
for final approval. Furthermore, there has been no meeting of the
Steering Committee since approximately the year 2000 and the Lands
Branch makes no formal reference to the plan.

The government response, in the order presented in the report:

The Department will determine whether the Geomatics Strategy
Implementation Plan was approved by Government.

The Department will review the relevance of the Geomatics Strategy
Implementation Plan.

In every other point, the department acknowledge the AG had stated departmental policy correctly.  Implicitly that’s an admission the department was not following its own policy.

At all.

Period.

For over a decade.

And that’s despite the fact that since 2003  - in other words for the past seven years – “[s]ound governance and responsible management have been the cornerstones of how our government runs the affairs of the province…”.

Unfortunately, most people in the province probably heard about or read the government news release  - with its obvious falsehood – rather than the frank acknowledgement by the lands department that it was in the process of sorting out the mess.

-srbp-

Brent Price Comparisons

For those who have been following along with the discussion of oil prices and provincial government revenue, it’s interesting to compare the price of crude oil at comparable parts of the fiscal year.

On Monday, as you may recall, we took a look at production.  As the chart showed, offshore oil production in 2009 is well below production last.  It’s so far down in fact that the provincial finance department’s predictions for 2009 might prove to be as accurate as the work of some late-night television psychic.

Well, prices are not doing much better.

Here’s a rough look at daily spot prices for Brent crude for the period 01 April to 30 June in both 2008 (blue) and 2009 (red).

Basically prices in the first three months of 2009 were running about 50% below the same period in 2008.

So prices were down by something on the order of 40 to about 50% and production was down by 14% in April, 39% in May, and 18% in June.  That pretty much guarantees that revenues would be off as well compared to the previous year. 

Sure enough,  figures obtained from Natural Resources Canada confirm that. Figures for September confirmed the general pattern for the first half of the fiscal year. Oil revenues are running about 15% below the provincial government’s budget forecast.

Not 15% below the December fiscal update that talked about bringing in something like $1.8 billion in oil royalties but 15% below the budget forecast of $1.26 billion.

Provincial government oil royalties are a function of  production, the royalty formula and the exchange rate for the Canadian dollar.  In the front end of the fiscal year there was a bit of a premium for a cheap Canadian dollar.  But as the Canadian dollar has climbed against the American greenback during the past six months, any premium that resulted from selling oil in U.S. funds and then converting to Canadian dollars vanished. 

And if you look at the actual royalty figures it’s pretty clear that the improved royalty rate coming from Hibernia in payout couldn’t offset the drop in production, the drop in price and the shifting exchange rate.  That’s a clue to the magnitude of the change in oil revenues.  Even with all three fields in the optimum royalty condition, royalties are well down in 2009.

Just to keep close track of all this, your humble e-scribbler will have to go looking for the October and November royalty figures later this month  That way it will be much more clear if the trends established in the front end of the year are continuing. Odds are they have carried on, despite the claims from the finance department in December.

As a last point, consider that a forecast by the Canadian Association of Petroleum Producers in 2009 showed offshore oil production declining in Newfoundland and Labrador over the next five to seven years.  There’s a bit of a peak close to 2020 and then things trail off again as some of the older fields dry up.

 

That’s the sort of information that should be guiding provincial government budgeting. Revenues aren’t going to be climbing ever higher.  Demands for essentially services will, however, and the costs associated with that will rapidly escalate. This is an old refrain around these parts as regular readers well know.

That doesn’t mean there have to be spending cuts;  it just means there has to be greater fiscal discipline, consistent and prudent planning and some serious attention paid to reducing the province’s debt load. In other words, the provincial government needs to be doing exactly the opposite of what it has been doing for the past three years.

There is hope.

Until last fall, you’d never have heard a cabinet minister admit what your humble e-scribbler and others have been saying for years.

But first Paul Oram and then others admitted the provincial government’s fiscal plan  is unsustainable.

Acknowledging there is a problem is the first step toward doing something about it.

Let’s see what happens.

-srbp-