A-G’s REPORT IMPORTANT BUT NOT COMPLETE (PART I)

The Report
of the Auditor General for the year ending March 31, 2014 is important for the observations
he offers regarding the state of the Province’s finances.  He delivers comment (but no conclusions) on the
impact of oil on revenues, the pattern of government spending and how the lack of
fiscal discipline is resolving into a serious structural deficit. It is a story
told in charts and graphs more than as a written narrative.     

The Report comes as the world price of oil has experienced a 25-30% hair-cut.  Many wonder how the Government will curtail public
spending without injuring the economy. Yet, everyone knows the time has passed for
the easy method of fiscal restraint.  

The A-G’s
Report deserves two very different comments.  



One relates to its incompleteness, though that is partly the fault of
the Department of Finance, on which the work is based.  The second is why it is important; a matter
which will be dealt with in a subsequent Post. 




On the issue
of completeness, the Finance Department’s data fails to properly reflect the
demands of an uncertain, changing and challenged economy.  It ignores the importance of integrated and comprehensive
data to the ability of businesses and individuals to make sound decisions given ours is an economy exposed to major and sudden changes.

If, for
example, you want to assess the impact on the Treasury of megaprojects like
Vale, Hebron and Muskrat, with their high paying jobs and large multiplier
effect, or how budgetary revenues may be affected as they wind down, you would
be out of luck.

Employment and government revenues reflect those megaprojects along with a boom in the housing sector,
significant infrastructure spending, and a large, but largely unquantified, mobile
labour force Alberta bound. 

Though a
long established phenomenon, if you ask how many workers regularly leave this
province for Western Canada (the Globe and Mail knows), wonder what the wages contribute to local GDP or to
government revenues, or if you want data on the impacts on the local economy of
the curtailment of some percentage of that activity, again, you will get no assistance  from the Finance data.  



Some agencies may wish to assess
the social implications of such change and prepare for an increasing demand on their services. 
Likely, they will wind up flat-footed.

Presumably,
the Government is performing econometric modelling of the NL economy on a
constant basis.  The presumption suggests
current data on employment, personal income, and government revenues including inputs for the oil price and other sensitivities, like project schedules, are accounted for. Large Corporations supply shareholders with “guidance” on their near term performance. But the Dept. of Finance is unable to share basic data and analysis on a relatively small economy to prepare them for even the next six months.    

It is
disappointing that the A-G fails to show the Department
of Finance how it might do better. 
      

His comments
regarding the public sector pension plan are also noteworthy.  While he correctly states that the agreement
to modify the pension plan will reduce the obligations of the government in the
midst of a vastly expanded eligible group, he does not question the Government’s
decision to seal a deal in which that reduction remains undefined and hence, not
fully understood. 

Perhaps
flat-footedness is a malady suffered by the many. 
It still boggles the mind that the Union leadership chose to be among
the Muskrat boosters without, at the very least, having first secured a large percentage of the
unfunded pension liability when the Government had the funds available. The
Government’s “Promissory Note” will provide little comfort if the three ‘black
swans’ (Muskrat overruns, low oil prices and a structural deficit) waddle
lock-step. 


Then there
is Muskrat Falls. The A-G makes this observation:

“The
size and complexity of the development creates considerable risk that the
Province and the proponents will have to carefully manage during the
construction phase. Ultimately, any risks related to project execution
(including costs and timing) will be borne by the taxpayers, ratepayers, or
both.”
That is hardly a courageous comment.


Ostensibly,
that is the A-G’s way of confirming he is serving notice on Muskrat. He does not suggest that he plans to examine how the Crown Corporation is messing with the Public
Tendering Act under the guise of “best value” in whatever way Ed Martin and co.
define it. 

Similarly,
he does not indicate that he will audit the Muskrat contracts already awarded
to determine the exposure, to the Province, of Nalcor’s failure to secure
“fixed price” tenders.

He does not
acknowledge that Nalcor has assumed most of the construction risk by accepting the cost of labour as its risk. 
Neither does he demonstrate concern that the Government has established
a ‘sham’ Oversight Committee; one that has yet to get the attention of Premier
Davis or even file its second quarterly Report.

There is one
bright spot even if it is a small victory.  The A-G acknowledges “Interest During Construction (IDC)” of $1.3
billion, as one of the costs of the Muskrat Falls project.  That is something Ed Martin has
always refused to do.  The A-G quotes
the latest forecast estimate as $8.3 billion, even rounding off Nalcor’s constructed
figure, for PR purposes, (without IDC) of $6.99 million.  Perhaps, the media will stop quoting the
lower figure, following which Ed Martin might catch on.

The A-G is
not in a line of work that calls for diplomacy.  The
Province’s chief Auditor is in the business of – dare I say it – “oversight”. His
authority and his Office should be giving Ed Martin
night sweats.  Instead, Nalcor don’t
know it exists.


When the
Government fails in its duty, whether by engaging in imprudent public spending or
by turning a blind eye to the excesses of the largest publicly funded project
in history, or when the Department of Finance wilts at the political risk of providing better data,
tying the megaproject economy to people and businesses who make important
decisions every day, the A-G’s Office should say so.  Where the authority has been granted his
Office, under Statute, it should step in. 



In time, this A-G will have to explain why he cowers to Ed Martin when so much is at stake.

While the
Government is carving out a legacy of recklessness, the A-G should be etching one
that is completely unassailable, earned with frequent displays of energy, determination
and courage.  He has a
lot of catching up to do.

Still, none
of these comments diminish the importance of his Report.
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.

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