NL Finance Minister Gets Downgrade (PART 2)

Last time, I discussed the Dominion Bond Rating Service
(DBRS) Report which confirmed the “A” credit rating of the Province. The
Minister of Finance, in making that announcement, noted a comment by DBRS that,
he said, was proof of why the Government should proceed with Muskrat Falls.

Uncle Gnarley obtained a copy of the full DBRS Report and
caught Tom Marshall being selective; too selective for a Finance Minister.  Transparency is
an important watchword; people have a right to know what their government is up
to and how important agencies, like DBRS, feel about the fiscal management of
our economy, especially the budgetary process, over which the government has
substantial control. 

When government decisions go awry or they engage in bad
management practices, the public should not be shielded from the result by
‘bafflegab’.  It is part of the reason we
are rightfully upset about the recent amendment to Bill 29, the Act governing
public access to information. 

This week, let’s look at what DBRS had to say about the NL
Budget, our current fiscal position and how the Muskrat Falls
project will play a key role in economic forecasts.

Many critics, including this one, have expressed concern that
for at least the last five years provincial budgetary expenditures have grown
by 8% annually; this in an economy that relies upon cyclical oil prices to
generate a third of government revenues; more likely over fifty percent,
 when indirect oil revenues are added.
These matters were not overlooked by DBRS.
Finance Minister Tom Marshall

The DBRS Report was less about what the government is doing
well.  It was more about sending a
message about the risks of the Muskrat Falls project and offering a blunt
assessment of what future Budgets should seek to correct.  

For the sake of brevity, I have chosen a few of the most critical excerpts:

Page 1, quote: DBRS notes that the price of Brent
crude has been significantly below the budget assumption of US$124.12/barrel
for much of the current year. Unless oil prices recover sharply, this
represents a significant downside risk to fiscal projections.

Referring to the small $44 million surplus planned for
2014-15, the DBRS proposes a “DBRS-adjusted” deficit of approximately $400
million and states, on Page 2, quote: In
to meet this target, spending restraint will be necessary as program
expenditure growth averaging more than 8% over the last five years is
incompatible with declining revenue.

Page 3, DBRS
cites four main challenges to the Provincial economy. Here are four quotes:

(1)    The
Province’s economic and fiscal results are heavily dependent on the oil
industry, with approximately 33% of revenues in 2011-12 coming from petroleum
royalties.  This does not take into
account the significant other fiscal revenues that are directly or indirectly derived
from the industry. Such dependence complicated the budgeting process….

(2)    While
resource-based industries have injected vitality into the economy, a lack of
diversification stands as perhaps the greatest impediment to ratings

(3)    Unfunded
pension liabilities remain sizeable….and are expected to grow to $3.4 billion
in 2012-13.

(4)    It
is not yet clear how the Province intends to finance its portion of the
estimated $4.4 billion construction cost of the Muskrat Falls hydroelectric
facility…..the Province’s rating could come under stress….

Note too,
that DBRS analysis is based upon a capital cost that is far less than the most
recent $8.5 billion estimate, if the former Minister of Natural Resources can be believed. Two more 
comments ought to be noted:

Page 4,
Based on historical levels of capital expenditure, DBRS-adjusted
deficits of $850 million and $400 million are estimated for 2013-14 and 2014-15,
respectively. In order to achieve these goals, expenditure growth is budgeted
at 2% in 2013-14 and 1% in 2014-15. DBRS considers these targets ambitious.

Page 4,
quote:  ….
deficit for 2012-13 could climb to over $1billion if the average price  (of oil) remains at ($106.55 per barrel
average) level.

quotations are noteworthy for their clarity as well as for the level of concern
raised. They require no embellishment or

However, as
DBRS noted, in addition to the issues affecting several forthcoming budgets, financing the Muskrat Falls project is a major concern.

Imagine if
those oil revenues don’t get back up to stratospheric levels for the next few
years (or decline further).  Imagine an
$8.5 billion Muskrat Falls project, as is now being discussed in official
circles.  Now, imagine $8.5 billion project with overruns! 

The Province
will have to come up with the ‘equity’ portion of the project, just as you
would, if you were buying a home.  The $2
billion it had squirrelled away for the purpose is already being eroded according
to some reports; continuing current account deficits will erode the

Province’s equity portion of the Muskrat Falls project is expected to be in the
range of 40% of estimated project costs plus any overruns.  Do the math. We will exclude Emera’s share of the project. 40% of $7.3 billion = $2.92
billion.  If we add 20% for cost
overruns (which is likely very inadequate), that’s another $1.46 billion. Conservatively
estimated, the Province’s equity requirement will be at least $4.38
billion.  Do you have any idea
where that money is going to come from?

If you think
that spending on health, social services and other programs won’t be affected
or public service staffing levels won’t be trimmed, think again!  

this Blog is beating a drum no one wants to hear; perhaps, people have heard
enough negative Reports over many years and want to hold on to the sweet sound
of good news and economic positivism. They just don’t want it to end.

Still, I suggest
we should hear the facts, no matter how grim, while we still have the fiscal
flexibility to change flawed thinking.  

The Muskrat Falls project, the inevitable cost overruns along with his refusal to fundamentally change the fiscal spending behaviour of the Government should remind the Minister of the mythical Icarus, whose failure to take advice brought him too close to the sun. The Minister’s wings may not melt, as did those of Icarus, but they will surely be clipped.   

time, I gave the Minister of Finance a “C”. 
Having reviewed his performance  again, for this week’s Post, it seems the
Minister is in for a downgrade.  I
suggest a “C-“.    




Des Sullivan
Des Sullivan
St. John's, Newfoundland and Labrador, Canada Uncle Gnarley is hosted by Des Sullivan, of St. John's. He is a businessman engaged over three decades in real estate management and development companies and in retail. He is currently a Director of Dorset Investments Limited and Donovan Holdings Limited. During his early career he served as Executive Assistant to Premier's Frank D. Moores (1975-1979) and Brian Peckford (1979-1985). He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB). Uncle Gnarley appears on the masthead representing serious and unambiguous positions on NL politics and public policy. Uncle Gnarley is a fiscal conservative possessing distinctly liberal values and a non-partisan persusasion. Those values and opinions underlie this writer's views on NL's politics, economy and society. Uncle Gnarley publishes Monday mornings and more often when events warrant.


If a Big Mac costs McDonalds $10 to produce and it is sold for $1.50, McDonalds will go out of business. They would not declare a profit!


Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.