Newfoundland–Should We Just Shoot It And Put It Out Of Its Misery?

Reality is merely an illusion, albeit a very persistent one. - Albert Einstein

The economics profession advances by one confusing financial disaster at a time. - Adam Davidson

As a passionate Newfoundlander (is there such a thing as an indifferent Newfoundlander?), I have always kept half an eye on the events taking place in my home Province.  The place that we know as The Rock is part of our DNA and we consider it more of a living, breathing place than merely a rock planted in the tempest that is the North Atlantic.  My culture is a fundamental component of who I am and how my heart beats.

On the other hand, as a long-time strategy guy for Wall St. and Fortune 25 companies, facts and figures rule my world and even when my heart occasionally screams to be heard in certain situations, my head relies on what it knows to be irrefutable and predictable realities.

And it is this hybrid human being that I am, being a New Yorker in a Newfoundlander’s body, that causes me great angst as I examine the contents of the 2014 budget for the great Province of Newfoundland and Labrador.

To analyze the budget line-by-line would put most people to sleep with the exception of those of us who live for the excitement of mathematics and complex problems.  That being said, consider these simple-to-understand numbers:

1. Newfoundland unemployment rate: February 2014 – 13.1%.  1976 – 13.6% (Source: Newfoundland and Labrador Statistics Agency).  The numbers outside of St. John’s are far worse.
2. Unfunded pension liability: $7.3 Billion (Source: Newfoundland and Labrador Budget 2014).  Think digging out of an unfunded pension liability is easy?  Here is the simple explanation of how this stuff works from Investopedia.  And yes – that is the simple explanation.
3. Overall debt: $9.8 Billion (Source: Newfoundland and Labrador Budget 2014).
4. Deficit for 2014: $537 million including borrowing of over $1 Billion (Source: Newfoundland and Labrador Budget 2014).
5. Total revenues for 2014: $6.5 Billion (Source: Newfoundland and Labrador Budget Estimate).
6. Total revenue from offshore royalties: $2.4 Billion - 36.9% of total revenue (Source: Newfoundland and Labrador Budget Estimate).

Now consider the fact that the Government is forecasting its offshore royalties based on a Brent Crude Oil Price of $105.64 / barrel (Source: Newfoundland and Labrador Economic Research and Analysis Division).

Meanwhile around the world …..

Consider that with concerns regarding the Chinese economy, the ongoing slow global economic recovery, events in places like the Ukraine / Crimea, significant additional production from shale oil and the like, Goldman Sachs is suggesting that Brent Crude Oil may fall to $90 / barrel with some outside high risk models suggesting a possibility of $80 / barrel (Source: Goldman Sachs Global Investment Research).

This creates the possibility of a decline in oil revenue for the Province in the range of 14% - 24% in a single year and for the foreseeable future.

And so if you thought that Budget 2014 was hard to swallow, if such a decline in revenue actually takes place, budgets in the future will be a staggering piece of voodoo to sort out.

But increased spending continues anyway …. why?

I think the answer to that question is best answered by Finance Minister Johnson.  When asked about spending in high cost areas (healthcare alone will cost $3 Billion in 2014), she replied that “people told her cuts wouldn’t go over well”.

And this is the crux of the matter.  When Government believes it is in the business of telling the people what they want to hear instead of what they need to hear, problems are bound to arise.

Or as Chris Morris once said:

The pursuit of approval usually ends in disaster.

And there’s another problem.

Ask the MHAs who are voting for the budget to sit down and explain the intricacies of it and the risks associated with it and you will find that most of them cannot.  If I approached you with an investment where I was risking your money and I could not satisfactorily explain the risks and rewards, you would chase me away (or possibly call the police if it looked too shady).  And yet, the average voter allows this to happen on a much larger, much riskier scale with their money and how the Government manages it.

And then there is this little item that doesn’t help.

With no disrespect intended to the Finance Minister, a BSc in Forest Engineering and a Masters in Environmental Engineering prepares you little to understand the numbers and exposes you to being vulnerable to accepting any numbers that others tell you are strong and viable.

And finally ….

Many of the people (and organizations) who would tell you that everything is in fact wonderful and that people like me are doom-and-gloom people are in fact benefitting strongly from leaving things just the way they are.  Follow the breadcrumbs and use data to inform you … don’t allow emotion (or their intimidation) to tell you otherwise.

The Province of Newfoundland and Labrador is “all-in” regarding oil revenue and uncontrolled spending to appease the populace and there is no Plan B if oil prices fall during a time of global uncertainty.

The Bottom Line

The Province of Newfoundland and Labrador needs a couple of things to happen in order to turn around a situation that is still salvageable:

1. It needs leadership that is not afraid to call it the way it is – someone who can cast a vision of tremendous optimism and possibility while at the same time, not being afraid to explain the realities to the people.
2. It needs voters who give a damn about their Province and who recognize that a short-sighted “Everything is grand - worry about tomorrow tomorrow” mentality as promoted by the Government is slowly but surely killing them.

Unless the Provincial Government takes a longer, more strategic, more intelligent, more transparent view of its situation and the voters do more than complain on radio programs and in coffee shops, you won’t need to shoot the Province to put it out of its misery.

Because there won’t be anyone left standing to pull the trigger.

To the people of Newfoundland and Labrador, I say this:

Demand better from those who lead you.  The place and the people are one, inseparable and bound together by 500 years of history that defines us.  Our storied, powerful history and culture and the unlimited potential of the Province are calling you to stand up for what is yours to take while it’s still available for the taking.

Are you willing to answer the call?

In service and servanthood,

Harry

Addendum – The Challenge - March 31, 2014

I mused on CBC about the challenges Newfoundland is facing.  That musing can be found here.

One of the great dilemmas facing Newfoundland and Labrador is the collision of these factors:

• A small population and thus a relatively small source of revenue from residents / corporations, creating reliance on revenue from the Federal Government, fluctuating oil prices and a fishery that was given away to the Federal government for its own use as a bargaining chip in international negotiation.
• A very large distributed area over which that small population is scatted.
• The complexities of that distributed area and the costs associated with getting “appropriate” levels of service to as many as possible, including remote areas where the costs of providing such services can never be recovered.
• A population that demands equal access to services without care as to cost.
• A resource-rich Labrador, a place that often feels that the Island merely uses them for its own needs.
• A government that tries to be too much to too many at any cost in order to get elected.
• A tangled knot of issues in the present that were created as a result of not addressing the aforementioned factors for years. Finding solutions for these issues would challenge even the most brilliant minds and are exacerbated by the notion that everyone wants a solution as long as they don’t have to give up anything themselves.  With this in mind, no one actually solves anything and the tangled knot grows in scale and complexity.
• Unions that won’t give an inch in regards to pension reform and other benefits for their members (current and retired).
• Political leadership without strategy, intelligence, courage, transparency or the realization that they exist to serve the people.  It is called public service for a reason.
• Too many people complaining on radio programs, on social media and in coffee shops while not applying their talents, strengths, energy and passion towards solutions and measurable results.

Is it any wonder that the Province finds itself in such a situation?  The challenges require leadership that can make difficult decisions and say “no” once in a while as a well as a populace that understands that if it wishes to live in a remote place, the quality of Life obtained from such a lifestyle must be traded off against the level of services that can be expected.

Unfortunately, everybody wants everything.

And when everybody wants everything, the result that is common is that everyone ends up with nothing or much less than they believe they are entitled to or is realistic to provide.

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