Equalization for beginners or why Loyola Sullivan gets $400 million from oil this year

Offsets. Clawbacks. Have. Have not.

Equalization is at the heart of the current Atlantic Accord dispute. Yet if you put a gun to the head of the average person at the nearest Tim Horton's, I doubt they could explain it.

Well, here is a simple explanation.

Every province in the country collects revenue (or income, if you prefer) from taxes and fees. We know them all too well - HST, personal income tax, corporate income tax, car licensing fees, park fees.

That money goes to pay for the services the provincial government provides, like health care, education, and provincial parks.

For just about as long as Canada has been a country, different provinces have raised different amounts of taxes on their own. It's pretty obvious that some provinces would be richer than others. In order to even that situation out, the federal government transferred some of its revenue to the provinces. The federal government established the current Equalization program in 1957 after years of debate and discussion with the provinces. The concept of Equalization was enshrined in the constitution in 1982.

Basically, Equalization is like a wage top-up scheme for provinces. The federal government figures out a national average amount of revenue each province should get per person. Fall below the average and the province gets a cheque from Ottawa. Meet or exceed the average and you get nothing. No province pays into the program; the money comes from federal government revenues. As it stands right now, Alberta and Ontario make more than the national average and get no Equalization. Saskatchewan will join them in the "have" category, as some call it, within the next year. All the other provinces get some amount of Equalization. Quebec gets as much as all the others combined because the money is paid out based on population.

In 1957, when the program started provinces were topped-up to the average of the top three provinces. Alberta received Equalization until 1964, but once its income went above the average it didn't get a penny in Equalization. In 1967, the average was based on all 10 provinces and since 1982 it has been based on five selected.

Over the years, some provinces like British Columbia and Saskatchewan have moved back and forth between the so-called "have" (no Equalization) and "have not" (get Equalization) categories.

Like any top-up scheme, as a province's own revenue goes up, the Equalization goes down. That's a pretty simple idea. A province doesn't really lose money; as its own income grows, the top-up is replaced by the growth in revenue.

Under the Atlantic Accord, Newfoundland and Labrador gets an extra payment so that as its oil income grows, Equalization doesn't drop as fast as it otherwise would. It was intended to last for 12 years to give the provincial government a chance to make some headway on its debt and infrastructure after years of hard times. There are current seven years left in the offset under the Accord.

In 1993, the Chretien government also gave Newfoundland and Labrador the chance to hide 30% of its oil income from Equalization each year until oil production ceases once the Accord offsets run out. It's called the generic solution because some other provinces can access it as well for other types of revenue.

The provincial government's proposal since June 10 would work this way. Instead of the offset or the generic solution, the federal government would give the province an amount equal to all of the province's direct oil income in a year, even if the province didn't qualify for Equalization. That's it in a nutshell.

The latest federal offer was to give the province an amount equal to the drop in Equalization from year to year caused by growth in oil revenues, until the province doesn't qualify for Equalization. After that, the province would only get 100% of its oil and gas revenues.

This gets confusing because the provincial government has been explaining the whole arrangement as those something was being taken away when actually it isn't.

Take an example from today with the Atlantic Accord, the generic solution and no new offshore deal. If the provincial government earns $100 million in oil revenues, Equalization would only use $70 million as the provinces oil income when it calculates the province's income.

If the province would have gotten $100 million in Equalization without that new oil revenue, Equalization doesn't drop by $ 100 million. Only $70 million of the oil money is used in the formula, so as far as Equalization is concerned the provincial government is entitled to $30 million.

The result? The province gets $100 in oil revenue PLUS $30 million in Equalization for a total of $130 million.

That's why Brian Peckford can say the Atlantic Accord delivers more money than oil revenues would alone. He's absolutely right.

In 2003, Newfoundland and Labrador earned a little over $123 million in oil royalties (taxes), but that does not include all direct income like corporate income tax. Under the Atlantic Accord the provincial government also received $178 million as an Equalization offset.

Newfoundland and Labrador 2003

Oil Royalties and Offsets

$123 million + $178 million = $301 million

Loyola Sullivan won't explain it to you that way, but those numbers are taken from the provincial government's own budget and the federal Department of Finance website.

This year, the provincial government will receive more than that in direct oil revenues alone. Including the existing offset or generic solution approaches, Newfoundland and Labrador's direct oil revenues in 2004 will likely be close to $400 million.

That's without any new deal.

With friends like Brian Peckford....

Danny Williams might well be sharing John Crosbie's palid view of Brian Peckford especially after the former premier's speech in Mount Pearl yesterday.

As The Telegram reported on Wednesday, Peckford's advice to Danny Williams was simple: leave the Atlantic Accord alone. The Accord already produces greater benefits for the province than Voisey's Bay or the Upper Churchill and, by implication, will continue to produce greater benefit as new fields are brought on stream or new discoveries made. In The Telegram and in other media interviews, Peckford has pointed to what is obvious to anyone familiar with the Accord: the Accord's Equalization offsets are already better than the situation available to any other province. Peckford pointed out, among other things, that the Accord has already provided the province with $500 million more than it would have received with Equalization alone.

Peckford should know since his government negotiated the Accord in the first place.

Peckford's position is the exact opposite of Danny Williams claim in June that, in the Accord, "Ottawa gave a bad deal to Newfoundland and Labrador."

Peckford's position is the exact opposite of the claim by Williams, Crosbie, Loyola Hearn and others that Ottawa takes money away from the province contrary to the Atlantic Accord.

Peckford's advice is to seek changes to the Equalization program itself. Ironically for Premier Williams, that is exactly what the Premier himself advocated in his election platform in October 2003. Peckford's idea of working for Equalization changes is exactly what Loyola Sullivan endorsed during the last federal election, despite Danny Williams insistence there was no way of judging the benefits of such an approach compared to the proposal for Accord changes originally made by Roger Grimes and the Vic Young Royal Commission.

"It's time now for substance, not style," The Telegram quotes Peckford as saying.

Peckford may be right; he may be wrong. Each of us will have to make that decision for himself or herself.

Certainly, Peckford does show that one can be an ardent supporter of Newfoundland and Labrador's cause, whatever that may actually be, and still disagree with the current provincial government.

Friends don't always tell you what you want to hear.

In that light, it might be wise for us all to go back and look more closely at Margaret Wente's column or the remarks by Professor Michael Bliss compared to Jeffrey Simpson. There may be substance beyond Ms. Wente's crude expression or Professor Bliss' modest proposal.

From one Ed to another

Just to set the record straight from the outset, I have known Ed Ring for the better part of 15 years. He is one of the finest people I have ever known and he has served his country with dignity, sensitivity and intelligence for most of his adult life.

On that basis, when he wrote a letter to the local newspaper and today is profiled in the Sunday Telegram on the issue of lowering Canadian flags, I paid attention to what he had to say.

I respect Ed Ring and I respect his opinion. But I disagree with him.

In the current dispute over the Atlantic Accord, the provincial government's objective should be to conclude the best possible agreement for the benefit of the province as a whole. It should work hard to make a strong case. The government should do everything reasonable within its power.

In order to reach an agreement, though, a couple of things are necessary. First, there needs to be a clear statement of objectives - people in the province have a right to know what the provincial government is trying to achieve; the federal government has to know as well.

So far, as readers of this blog will see, the provincial government position has changed very significantly between the time the Prime Minister accepted the original provincial proposal and June 10.

The problems this change creates should be obvious. If the new proposal, if the new demands, simply can't be met without causing greater difficulties within Confederation then the federal government can never agree. No federal government could. Politics is, after all, the art of the possible. If the demands are impossible to achieve then nothing will be resolved.

The other problem comes for the people of Newfoundland and Labrador who are called on to support the provincial government in its struggle. If we cannot know what is being sought and what has been offered, then there is no way to judge success or failure. There is no way to see if there is room for reasonable compromise that allows us to achieve what is possible.

No democratic government worthy of the name can ask its citizens to go to war - figuratively or literally - without their informed consent. Democracy thrives on information and consent. Thus far, the provincial government has been short on the former, although it enjoys much of the latter.

Second, in order to reach an agreement there has to be effective communication: we have to speak and be heard; we also have to listen. Any obstacle to effective communication is an obstacle to a peaceful settlement of any dispute, no matter how egregious, no matter how deeply felt, or no matter how long-standing the dispute may be.

Here's where I disagree with Ed Ring.

Pulling down flags, even with an attitude of respect, is not designed to open people's minds. It doesn't encourage them to open their ears. The visceral reaction of Canadians across the country was predictable. The result has been predictable too. Editorial opinion across the country has solidified against the Newfoundland and Labrador government's proposal. The Globe and Mail has changed its position from one of support to opposition.

In the same way, two columns this past weekend are also predictable. Margaret Wente may have been more crass than Michael Bliss in her statements but their conclusion is the same: put up or shut up, Newfoundland and Labrador. If you want to separate, don't let the door hit you on the way out. They have concluded that we are less valuable to the country than any other province, that Canadians from this place are not worth the bother of further discussion.

The local reaction has been predictably strong. Some claim we are more unified here than ever before, but none has dared to check and see what they think they are unified for. We know what they are against and that's more than a bit different. That's the easy bit.

Those statements about unity beg a simple question: is the provincial government any closer to achieving an agreement now that it was before the flags came down? Unequivocally, the answer is no. Even the Premier agrees with that conclusion, it has become so obvious.

So Ed, I agree the Premier only has so many tools in his tool box, as you put it. But Canadian experience in resolving international conflicts should point out the folly of pushing people apart through slights to cherished symbols. We know the value of one of the most powerful tools in even the skimpiest of tool chests. Thumbing your nose at the other guy just doesn't cut it.

The best tool any political figure has is the one needed most now, when two sides are polarized, when trenches are dug and no settlement seems likely. This has now become a time for leadership.

If Danny Williams hasn't done so already, I'd strongly recommend he give Ed Ring a call.

Leadership is what Ed is all about.

John Crosbie and hand biting

It's always curious when John Crosbie, one of the architects of the Atlantic Accord pops up in support of those who are now attacking his deal from all sides. It's curious because nothing has happened since 1985, when the deal was signed, that works to the detriment of Newfoundland and Labrador. Not a single thing.

It's also strange - actually more like incredible - when Crosbie lambastes a newspaper columnist who complains, among other things, about a premier biting the hand that supposedly feeds him. One wonders where the provincial government might be today were Crosbie still in his old position as Ottawa's representative in Newfoundland and Labrador.

Following is an extract from John Crosbie's 1997 political memoir, No holds barred, (Toronto: McClelland & Stewart, 1997), p.357:

"The accord had three principles. First, the principal beneficiary of the resources should be the province of Newfoundland and Labrador. Second, the resources should contribute to energy security for all Canadians. Third, producing provinces should be treated equally in revenue-sharing, whether the resource was on land or offshore. Peckford was ecstatic. 'There is no other document, including the Terms of Union, that will come as close to achieving economic and social equality for the people of Newfoundland and Labrador as this,' he said. '...To tell the truth, I didn't think we could get everything that is in that agreement...We've got a document that every single Newfoundlander who can read and write will consider the most important in the history of this rock.'

The reaction in Newfoundland was so positive that Peckford called a snap election. Our federal Tory government helped handsomely. We announced a $180 million highways agreement, with $112.5 million of the total to come from Ottawa, $3 million in funding for Memorial University, and $400, 000 towards construction of a new music school, among other worthy projects.

Peckford had no sooner won re-election with a comfortable majority, however, than he started biting the hand that had fed him so lavishly. When Finance minister Michael Wilson brought down the Mulroney government's first budget, it called for the partial de-indexing of tax brackets and social-welfare payments. Peckford promptly denounced these deficit-fighting measures as unacceptable. He and his Tories voted with the Liberal Opposition in the [House of] Assembly to pass a resolution condemning the federal government and our Budget. I felt that with friends like Peckford we'd never need enemies!"

A little later Crosbie relates a controversy over the Come-by-Chance oil refinery. (p.359)

"Both the Premier and his Finance minister, John Collins, accused the federal government of being insensitive to regional needs and of not paying attention to Newfoundland. At the time Ottawa was providing 50 per cent of the revenues of their government. I called a news conference to point out this interesting fact: 'Dr. Collins is suffering from at least two human failings,' I said. ' One appears to be greed, the other ingratitude. He seems to specialize in biting the hand that feeds him..."

Later in that same chapter, Crosbie relates yet another controversy, this time over a provincial demand for increased federal transfers. (p. 360)

"He [Peckford] told the press Newfoundland was facing fiscal chaos and would be in a 1930s-style financial disaster within two years unless Ottawa fundamentally redefined the province's place in Confederation. He demanded a new deal in regional development, equalization payments, established program funding, and fisheries jurisdiction. In Peckford's view, 'We've got, at the outside, two years and then it's 1933 all over again.' Peckford said he had informed Ottawa of the perilous situation in a document 'that would blow your mind.'

I held a press conference at St. John's a few days later, together with my caucus colleagues Morrisey Johnson and Joe Price. I pointed out that, if the province was facing financial chaos it was facing it despite the generous help of the government and the people of Canada."

Does any of that sound vaguely familiar to anyone?

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
be:

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.

-srbp-

What Danny wants.....

For every person in Newfoundland and Labrador who claims to stand solidly behind Danny Williams in his efforts to change the Atlantic Accord, there is a different version of what the premier wants. For some it is to get "our" share of the offshore, as if the Atlantic Accord doesn't exist. For others it is fixing a problem with the Accord. For still others it is to get "our" revenues plus a bit more besides to help out.

For Loyola Sullivan, it now seems to mean reparations for every possible slight the province has received or every bad deal we negotiated. Compared to the Upper Churchill deal, the Versailles diktat was a minor annoyance.

Odd then that the Premier told the House of Assembly last fall that there was no need to debate the Accord in the House because "we know what we asked for...".

That's an odd comment, because, as you will see below, there are actually three different versions of what the Premier asked for. Just so that his supporters don't suddenly turn blue with rage, rest assured that the three versions are accurate and based on official documents.

The following information comes from four sources:

- the Progressive Conservative policy manual, the so-called Blue print;
- correspondence with the Government of Canada, released by the provincial government through Freedom of Information requests and news releases;
- media interviews by Premier Williams and others; and,
- provincial government news releases

At the outset, it is important to recall two aspects of the Atlantic Accord in particular.

First, the provincial government gained the right under the Accord to set its own revenues from offshore production as if the resources were on land, that is as if they were "own-source" revenues. This includes royalties. The provincial government receives 100% of the revenues it has set without any reduction; in Fiscal Year 2004, the provincial government will receive at least $300 million in direct revenues from offshore oil production [Williams to Martin, May 26, 2004 attachment "Offshore revenue, existing offsets and proposed offset"; mid-year financial statement by Hon. Loyola Sullivan]

Second, the Atlantic Accord provides that Equalization will apply to these revenues. As such, as provincial own-source revenues grow, the amount of Equalization top-up declines. The Accord does provide an Equalization offset that effectively shielded some revenues from the Equalization calculations. It is clear from the Accord itself that this was intended to be a temporary, declining offset. ["The Atlantic Accord: memorandum of understanding between the Government of Canada and the Government of Newfoundland and Labrador on offshore oil and gas management and revenue sharing", 11 February 1985. www.cnopb.nfnet.com/publicat/reg/aa_mou.pdf.]

This interpretation is confirmed by comments made by John Crosbie in a 1990 interview with the Sunday Express. Commenting on the claim that the Accord reduced the province's Equalization entitlement due to growing provincial government revenues, Mr. Crosbie said:

"That's the whole point to the [Equalization] formula... This is nothing to complain about; this is something to be joyous about. So why would they try to pretend that Newfoundland gains nothing from the royalties? I mean this is absolutely bloody nonsense..." [Philip Lee, "Newfoundland, Ottawa clash over Atlantic Accord royalty provisions", The Sunday Express (St. John's), 23 September 2004,]

With that background, let us now turn attention to Premier Williams' proposals.

Danny Williams: Premier in Waiting, October 2003

The Blue Book (www.pcparty.nf.net) contains no reference to changes to the Atlantic Accord.

Rather, it commits a Conservative government to seek changes to the entire Equalization formula so that revenues from non-renewable natural resources are removed from the calculations.

The Blue Print also states that:

"[i]n exchange, we will commit, in a formal federal-provincial agreement if necessary, to spend non-renewable revenues to modernize economic infrastructure in the Province and to bring down the provincial debt, so that future generations of Canadians living in this Province will continue to benefit long after the resources are used up." [Emphasis added]

Danny Williams: January - June 5, 2004

Premier Williams met with Prime Minister Martin in Ottawa on December 18, 2003 and again by telephone on January 6, 2004. The Premier follows up with a letter to the Prime Minister on the same day. He described the province's fiscal position and the government's plans to address the problems. Included in that letter is the following statement:

"Simply put, the ability to invest 100% of our Atlantic Accord oil revenues in economic infrastructure and in paying down our debt would go a long way to helping Newfoundland and Labrador stand on its feet in the long term." [Williams to Martin, Jan 6, 2004]

The Prime Minister replied on January 27, 2004:

"With regard to the Atlantic Accord, as I stated on January 6, 2004, the Government of Canada is open to discussing the issues related to offshore resources. However, it is imperative that these discussions be based on the principle of fair treatment across the country." [Martin to Williams, Jan 27, 2004]

Some details of the provincial position were contained in a slide presentation made to John Efford on February 27, 2004 and titled "Proposal for new Atlantic Accord offset mechanism". This appears to be the only written version of the proposal, except for a similar slide presentation made available to news media and tabled later in the House of Assembly.

The presentation focuses on changes to the Equalization offset provisions contained in the original Atlantic Accord. These were intended as temporary, transitional grants to the provincial government designed to offset losses in Equalization as provincial own-source revenues grew from oil production. The original offset nominally shielded a declining amount of provincial revenue from Equalization calculations.

An assessment of the original offset prepared by Wade Locke in 1991 concluded that the original offset provisions actually shielded only 3% of revenues from Equalization including the offset payments. [Wade Locke, An examination of the equalization protection provided under the Atlantic and Nova Scotia Accords, (St. John’s: Memorial University Institute for Social and Economic Research, 1991) ]

Slide 9 from the February 27 presentation contains the following points:

- Replace the existing offset provisions [Editor's note: due to expire in 2011/2012]
- New offset mechanism
- Provide a payment equal to 100% of the net direct provincial offshore revenue
- Net Direct Revenue
- Royalties and Corporate Income Tax which is generated in the NL offshore area, less the equalization clawback (currently at 70%)

There is no specific reference to a time period for the new offset, although a bullet point on Slide 10 states that the new mechanism would provide "benefits over a longer period". The original Accord offset mechanism shielded 100% of revenues but only for the first four years. As noted above, the original Accord offset provisions expire in 2011/2012 and shielded less revenue from Equalization than indicated in the slides.

The Chretien administration provided a new Equalization offset option to the provincial government in 1993, one that shielded more revenue than the original Accord and did so for the duration of oil production. This is the so-called generic option which shields 30% of oil revenue from Equalization calculations; in other words if oil revenue is $100 million, then only $70 million is used to determine the provincial government's per capita fiscal capacity.

The Premier's commitment on using revenues for debt reduction and infrastructure is repeated in a letter to the Prime Minister on May 21, 2004. Another letter on May 26, 2004 to the Prime Minister contains Slide 9 of the deck presented on February 27, 2004.

The provincial government's position can be summarized as follows:

1. A new offset mechanism that provides the provincial government an amount equal to 100% of direct revenues in addition to direct revenues.

2. Direct revenues are defined as royalties and corporate income tax. [Note that under the Atlantic Accord, provincial government direct revenues comprise six separate types, including royalties and corporate income tax. There is no explanation for this apparent mistake on the part of the provincial government.]

3. The money would be used for debt reduction and infrastructure development.

4. The time frame is unclear. It can be read as meaning seven years (replacing the existing offset) since the time frames match and the doubling up of revenues replaces the Accord's original offset with a concept that "benefits over a longer period" (12 years total versus four years).

Danny Williams: June 10, 2004 to current

The Premier and Prime Minister spoke by telephone in a now infamous conversation on Saturday June 5, 2004. Fully five days later, the Premier wrote to the Prime Minister ostensibly to confirm the agreement. His letter contains the following statement of the provincial proposal:

"The proposal my government made to you and your Minister of Natural Resources provides for 100% of direct provincial revenues generated by petroleum resources in Newfoundland and Labrador Offshore Area [sic], to accrue to the government of Newfoundland and Labrador and be sheltered from the clawback provisions of the Equalization formula, (currently at 70%). Direct provincial revenues include royalties, provincial corporate income tax, and fees forfeitures and bonuses. Our proposal is for the current time limited and declining offset provisions in the Atlantic Accord to be replaced by a new offset provision continuing over the life of the offshore petroleum production which would provide a payment equal to 100% of the amount of the annual direct provincial revenues which are clawed back by the equalization program."

This may be summarized as follows, with the changes being obvious:

1. The offset is in addition to provincial direct revenues, as previously proposed.

2. Direct revenues are defined more accurately.

3. The commitment to direct the added revenues to specific purposes has been removed.

4. The duration of the offset is clearly stated as being for the life of production.

Several points are worthy of note beyond the obvious changes.

First, no provincial government currently enjoys or has ever received this type of transfer from the Government of Canada.

Second, this proposed "offset" would continue irrespective of whether or not the provincial government qualified for Equalization transfers. In other words, under the revised Williams' proposal the provincial government would receive an amount equal to 200% of its direct revenues (direct revenues + new transfer) even after the provincial government's fiscal capacity met or exceeded the national standard used for judging Equalization entitlement.

Newfoundland and Labrador is forecast to be off Equalization, that is to become a "have" province within the next three to five years, based on economic growth, oil prices and development of Voisey's Bay and Hebron. Under the Williams revised proposal, Newfoundland and Labrador would receive federal transfer payments to which no other province is entitled, unless Nova Scotia attains the same "have" status.

The Premier has implicitly acknowledged this interpretation in several media interviews. He no longer refers to an Equalization offset but to a new type of offset designed to "keep us whole". Premier Williams explained it to Carole MacNeil of CBC Sunday in this way during an interview in October 2003:

Williams:...What the issue is, once we get to equalization, the equalization border - the five province standard - once we get equalized, we are not asking for equalization. That's where the misunderstanding is: we are saying that once our revenues get to a point where we no longer need equalization, we don't want it. We'll be the same as every other province that gets equalization - New Brunswick, Prince Edward Island, Nova Scotia. What we want, though, is the right, after we equalize, to keep 100% of our revenues, our provincial royalty revenues. The cap prevents us from doing that. (...)

MACNEIL: Until you're equalized.

WILLIAMS: No, no and beyond, because why should we get less than 100% of our revenues after we're equalized? [The full transcript of this interview may be found at www.cbc.ca/sunday/williams.html]

It must be noted that the Premier's reference to the cap, the use of the Ontario fiscal capacity from the October 2004 federal offer, is completely erroneous.

Under the Atlantic Accord, the provincial government continues to receive its own revenues, including royalties, in their entirety until oil and gas production ceases. There is no mechanism by which those revenues are reduced, nor has one ever been proposed. All that would occur once the provincial government is "equalized" is that the Equalization transfers would cease. Provincial government own-source revenues, including oil and gas revenues, continue unaffected. The cap was merely a mechanism by which the federal government proposed to calculate the added transfers in addition to Equalization and direct revenues and determine a cut-off point for what was originally an offset to Equalization losses. The Premier's convoluted language in the MacNeil interview appears to represent, among other things, an attempt to reconcile his pre- June 5 position with his current one.

Third, the provincial government proposal on June 10 eliminated its own condition on how the added transfer would be spent.

Conclusion

The provincial government proposal on Atlantic Accord changes have gone through at least three substantive alterations. The provincial government's contention that its position has been consistent flies in the face of direct evidence.

The changes are not inconsequential. The Government of Canada must always be mindful of the impact of special arrangements with individual provinces on its relations with the others. It must also be mindful of the financial implications of such arrangements. Quebec, for example has been seeking special treatment of the parental leave program within Quebec all at federal expense. The federal government under Jean Chretien rejected the concept out of hand.

The revenues being transferred, especially under the revised proposal, are not provincial revenues. They are federal revenues collected within Newfoundland and Labrador to sustain federal government programs and services. Historically, in this province, the federal government has provided almost half of the money the provincial government uses to provide services that are exclusively within the provincial government's constitutional jurisdiction. In the current fiscal year, for example, the provincial government will receive an estimated 75% of all provincial and federal tax-type revenues in the province through its own sources plus Equalization and other transfers. The Williams' revised proposal (post-June 10) would see that situation continue, contrary to the basic principles of the Equalization program to which John Crosbie referred.

Irrespective of the position one takes on proposed changes to the Accord, it is clear that the Williams administration has changed its position at least three times. Perhaps most strikingly, in light of continued references to the province's supposedly unprecedented financial situation, the government's own commitment on how the money would be spent has been dismissed

The crux of the current impasse may well be that the federal government is working to meet the original Williams proposal, something that is attainable in the context of the Constitution and historical federal-provincial fiscal relations. In the meantime, the Premier has committed that he "will not say yes to less" than his revised proposition.

An irresistible force may well have met an immovable object.

Who was Sir Robert Bond, anyway?

One of my mainland friends pointed out that many people may not be familiar with Sir Robert Bond. Truthfully, a great many people in Newfoundland and Labrador may not know who he was either. Following is a slightly expanded version of the biographical sketch I included at the end of the Bond Papers.

I chose Bond as the figurehead for a series of discussion papers for two reasons. First, Sir Robert Bond is arguably one of the best prime ministers ever produced by Newfoundland and Labrador either as a province of Canada or as a Dominion before 1949. Second, he stands apart from other local politicans, then and now, for his resistance to the provincialist perspective. He saw that there was more to the world than what can be seen from the nearest headland.

As S.J. R. Noel has described him, "though he was from the St. John's merchant class, he was not of it." [Politics in Newfoundland, (Toronto: University of Toronto Press, 1972), p. 33]



Sir Robert Bond

Born in St. Johns, in 1857, Sir Robert Bond served as Prime Minister of Newfoundland from 1900 to 1908.

He was educated at Queen's College, Taunton and later read law at the University of Edinburgh. Bond was never called to the bar. He entered politics at age 25 and served for a time as Speaker of the House of Assembly. In 1889, Bond was appointed Colonial Secretary in the administration of Sir William Whiteway. At the age of 43, and as leader of the Liberal Party, Bond became prime minister with the largest majority ever seen in the House of Asembly to that time.

Bond is best known for negotiating two reciprocity (free trade) treaties with the United States and for bringing about an end to the French Shore in Newfoundland (1904). The free trade agreements were blocked by the United Kingdom based on objections from Canada, actions that continue to fuel resentment among nationalists in Newfoundland.

During Bond’s administration, Newfoundland enjoyed a period of relative prosperity including advances in agriculture and the establishment of a paper mill at Grand Falls. In 1902, Bond attended the Imperial Conference and authored a paper on the defence of Newfoundland. The paper displayed Bond’s grasp of international relations and defence issues, describing both the strategic importance of his country and the defensive works needed to secure it as part of a broad international coalition. His suggested defence preparations presaged installations built in the 1940s.

As Colonial Secretary in 1894, it fell to Bond to deal with the consequences of the local Bank Crash in December 1894. Bond negotiated with the Government of Canada about Confederation, but the talks failed when the Government of Canada refused to assume Newfoundland’s public debt. In the event, Bond was able to secure a loan to stave off the country’s financial collapse by putting up his own property as collateral.

Bond retired from politics in 1914, retiring to an estate he called The Grange located at Whitbourne. He experimented with agriculture, including the importation of dairy cattle. A Knight Commander of the Order of St. Michael and St. George, Bond was sworn to the Imperial Privy Council in 1902.

Such was his reputation that in the political chaos that descended on Newfoundland in 1920s, efforts were made to lure him back to active politics. He resisted the efforts and died at Whitbourne in 1927.

Which is to be Master?

In July, I released a discussion paper on the Williams administration proposed changes to the Atlantic Accord.

The title comes from Alice through the looking glass, by Lewis Carroll. The theme running through the paper is that so much of Danny Williams' claims are based on changing the meaning of words. For example, although the provincial government already receives its entire provincial government offshore revenue, he claims that 100% was merely 14%.

Or, in the Atlantic Accord, the province gains more than just provincial government revenues from offshore oil development. "Principal Beneficiary", under the Accord includes the right to set revenues (not the amount of money involved), the right to manage the resource with the federal government, and local preference for jobs and spin-offs work.

Well, to get the full paper in PDF format, just send me an e-mail (ed_hollett@hotmail.com) and I'll forward it to you. If I can figure out how to upload the file to the blog, I'll post it. The paper is also available online through Greg Locke's blog (www.greglocke.com) in a posting he made in July. Greg and I may not see things exactly the same way, but he did manage to give this paper some exposure and give a decent summary.

In the meantime, here's an article based on the paper that was carried in the Telegram at the time.

Which is to be master?

Public discussion, more information needed on Atlantic Accord changes

The Government of Newfoundland and Labrador currently receives 100 per cent of provincial revenues. Under the 1985 Atlantic Accord, the provincial government gained the right to set its own revenue regime for offshore oil and gas developments and it has done so through legislation and development agreements with the companies that have brought Hibernia, Terra Nova and White Rose on stream. It collects every penny of the revenues defined in the Atlantic Accord, and set out in those development agreements. In addition, it collects revenues, mostly taxes, from the business that have grown up around oil production.

The Williams administration, like the Grimes administration before it, claims money is lost through an Equalization "clawback". There is no clawback in the way that word would normally be used. Ordinarily, Equalization is a glorified top-up scheme. Any provincial government making less than a national standard from its own-source revenues gets a cheque from Ottawa to make up the difference. Make more money; get less of a top-up. If there was a sudden growth in high technology manufacturing - if the province became a Celtic Lynx - Equalization would be reduced accordingly.

The Atlantic Accord contains a provision than offsets any losses in Equalization transfers resulting from growing provincial government revenues, for a period of 12 years. The calculation is made on a 10 province standard, so it is no surprise that last year the province collected $123.8 million in oil royalties and received $178 million in offsets. The major problem with the offsets - if there is a problem - results from the fact the offset provisions are triggered by quantity of oil produced, not on their economic impact as such. Once triggered, they decline over time irrespective of how many oil fields have been developed or what their economic benefit has been to the province. Danny Williams' current proposal is apparently aimed at changing the offset provisions of the Accord.

There are at least two major problems with the proposal from the Williams administration that would, as Danny Williams recently put it, "renegotiate the Atlantic Accord". The most significant problem is that there is no plain English description of the problem or of the government's proposed solution: it isn't in writing. How can anyone judge the success or failure of upcoming negotiations between the federal and provincial governments if we do not know what the Williams administration is seeking?

The second problem is in the way the argument has been framed. The Williams administration claims that by changing the offsets, the provincial government can become the "principal beneficiary" of the offshore, as the Accord intended. Unfortunately, the Atlantic Accord does not say the provincial government will be the principal beneficiary nor is "principal beneficiary" defined as meaning provincial government revenues. The Atlantic Accord delivers significant benefits to the province as a whole. The provincial government gets the right to co-manage the offshore with Ottawa. The provincial government sets its own revenues, as if the resource was on land. The province as a whole gets industrial benefits, something Brian Mulroney considered to be a major aspect of the Accord. Those industrial benefits go against the spirit if not the letter of inter-provincial free trade agreements and the North American Free Trade Agreement, Right now, the Accord is exempt from NAFTA.

"Principal beneficiary" is central to the Accord; redefining it changes the Accord fundamentally. Change the Accord's underlying principals and it may well become a new deal, one that would be subject to NAFTA. Of all the Accord provisions, the one that would clearly not fit NAFTA is the industrial benefits provision. We can't be certain, in largest part because the Williams administration proposal has not be clearly stated and thoroughly examined. There is enough information, though, to encourage the provincial government to be cautious.

It should not escape notice that in making its proposal, the Williams administration is merely picking up where the Grimes government left off. There is precious little difference among the three political parties in the province on this issue. In itself, that should be cause for concern, as Mark Twain warned.

More important than mere contrariness though, the absence of public debate prevents a thorough discussion of options, a chance to see dangers and avoid them. Getting more cash from Ottawa is one thing. If that comes at a larger cost, namely bringing the Accord under NAFTA, then the Premier will need wider public support to continue on his path. If nothing else, the people of the province have a right to know what is being talked about. They will either reap the reward of the proposed changes or bear the burden.

-30-

Beginnings

In July, 2004, political events in Newfoundland and Labrador prompted me to do something I had not done before: I wrote a research paper on the Atlantic Accord. It was an attempt to examine offshore oil revenues and the Atlantic Accord in light of what the Accord actually provides. it was an attempt to evaluate the provincial government's proposal based on what had been made public to that point.

Events of the past few weeks have prompted me to set up this blog as a way of fostering some discussion of the issues involved in the Accord dispute. With the removal of Canadians flags from provincial government buildings has come a deluge of nationalist and independentist sentiment throughout Newfoundland and Labrador. At the same time there has been precious little substantive discussion.

Those of us who disagree with the government's position run the risk of being labelled as traitors or worse. The premier has publicly discouraged debate in the House of Assembly. In any thriving democracy, sound public policy can only come through informed debate and discussion. That's what I hope this blog becomes: the basis for informed debate.

Incidentally, another paper is on the way that relies on great deal of information I have managed to obtain since July. I will post both the original paper here as well as the new one, and any other material as it becomes available.