Dwight Ball has stuff to say too…

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(...but Kathy Dunderdale is stil right.)

In case you missed it, last week I wrote about Muskrat Falls and the provincial deficit. If you haven’t read it yet, check it out here. Nothing in this blog post will make sense if you haven’t already read that one.

My briefing with Department of Finance officials on the deficit and Muskrat Falls and whatnot was on Friday, March 8. I wrote it up over the weekend, and posted it online last week. Then, in an act of utterly sublime partisanship, the Liberals got in touch with me. They wanted to bring me in for a competing technical briefing.

All right then. On Friday, I dutifully trooped up to Confederation Building to sit down with Liberal Leader Dwight Ball and let him rebut the Department of Finance’s briefing.

“So, what did I get wrong?” I asked, as I walked into his office.

As it turns out, I basically didn’t get anything wrong, Ball said. He just wanted to emphasize a few points that I didn’t go into detail on. What followed was about 45 minutes of back and forth that would sound like total gibberish to most normal, well-adjusted members of society who don’t spend their spare time leafing through government budget documents.

The first takeaway from the whole thing, and probably the most important one, is that this stuff is horrendously complicated. When it comes to how the province is doing its financial reporting, near as I can tell, it’s all above board. However, as I explained last week, when you get into cash and accrual accounting, current expenditures and amortized capital expenditures, investment equity cash allocations and debt servicing costs, it gets really bloody confusing really fast. The evil byproduct of this is that anybody can seize one little fact, which may in fact be true, and use it to mislead.

For example, somebody can point to the $664-million line item in the 2012 budget. It’s true. That line item exists. To say that the government “spent” $664 million on Nalcor is misleading, though. When Dwight Ball said on March 11, “The $664 million that came out of last year's budget does affect the deficit,” he is wrong. Period. Completely, unequivocally factually incorrect. Sorry, Mr. Ball.

It’s also misleading when Ball said on March 12 that money could have been used for something else.

(As I explained, that money is part of an equity investment in Nalcor, and therefore doesn’t get included in the deficit calculation. If the same amount of money was used instead on, say, the adult dental program, it would be part of the accrual budget calculation, and therefore it would contribute to the deficit. You can’t just say that cash used for a capital equity investment could be spent just as easily on current-year program expenditures.)

Ball did make a few good points during our chat on Friday, and given that he is the leader of her majesty’s loyal opposition, let’s give him his due and emphasize those points.

MUSKRAT SPENDING WILL CONTRIBUTE TO THE DEFICIT — A BIT

First of all, he pointed out the same thing that I said in the original post: while Muskrat Falls spending isn’t directly included in the deficit calculation, it does affect the province’s cash position. Like I said last week, the government will run out of money in the bank account sometime in the coming budget year, and they’ll have to start issuing bonds — borrowing money — to pay the bills.

Once we start borrowing money to pay for our cash obligations, including Muskrat Falls, this absolutely will contribute to the deficit — a tiny bit. For the sake of round numbers, say the government pumps $1 billion into the Muskrat Falls project as an equity investment in 2013, and we’ll have to borrow the lot of it. Let’s say we’re borrowing at a three per cent interest rate. That translates into about $30 million in interest per year, and yes, that very much is included in the deficit calculation. Now, $30 million is serious money, but it’s a tiny fraction of the billion dollars we’re putting into Muskrat Falls in this hypothetical example. It also represents a tiny fraction of the $1.6-billion deficits we’re forecasting this year and next year.

To say that Muskrat Falls borrowing will affect the deficit in the future is true, but if anybody tells you that it’s one of the major factors driving the deficit, they’re either lying to you, or they don’t understand the structure of the province’s finances. Similarly, it’s only true that Muskrat Falls spending will affect future deficits. Since all Muskrat Falls spending thus far has come from cash reserves, it hasn’t involved any borrowing, so it hasn’t added to our debt servicing costs.

Ed Hollett makes essentially this point, and explains it in some detail in this post here.  It’s well worth a read.

OK, so that’s point No. 1 from Ball: Muskrat Falls borrowing affects our cash position, and therefore will contribute to future deficits, a tiny bit. Got it? Good.

HOW MUCH IS THE DAM THING WORTH?

Point No. 2 for Ball is essentially that people need to think about what it really means when the government claims they’re putting money into an “equity investment” that will create an “asset” with value.

All by itself, the Muskrat Falls dam in Labrador will be a bunch of big hunks of cement and some massive turbines. Just sitting there, it’s not worth anything. The value comes from you and me and everyone else in the province who pays an electricity bill.

The value of the asset is calculated by the cashflow that it can generate, not the money that we pump into it. If the government pumps, say $4 billion worth of cash into the project at first, they’ll say they have a $4 billion equity investment. But then, when the cost overruns come, and the government has to plow another $2 billion into the project, the dam doesn’t magically become $2 billion more valuable. It only gets more valuable if the government then hikes electricity rates to get $2 billion more from us.

When the cost overruns happen — and if you think there won’t be any cost overruns, that’s absolutely adorable — Ball said he believes the government may choose to just pump money into Muskrat Falls and call it “spending” and allow it to contribute to the deficits instead of calling it an “equity investment” which will force the government to increase electricity rates.

If this happens, then those Muskrat Falls construction cost overruns would contribute to the deficit directly. But that’s an awfully big if. To me, this seems pretty speculative. For starters, we’re talking about a theoretical decision that the government could make several years from now. For another thing, there’s literally zero evidence the government would make that choice, and in fact, there’s plenty of evidence to the contrary.

For one thing, remember that Muskrat Falls filibuster from before Christmas? One of the major issues they were debating in that was excluding the Public Utilities Board from rate setting when it comes to Muskrat Falls. Essentially, the amended legislation that was so controversial will force the PUB to pass along whatever costs are associated with Muskrat Falls to the Newfoundland and Labrador ratepayers, including cost-overruns. Why go through the song and dance of amending the legislation to make sure that it’s possible to pass along all cost-overruns to the ratepayers if you’re not going to do it?

IF YOU DON’T LIKE IT…

The overwhelming impression I got from sitting down with Ball was that he still very much opposes the government’s plan to develop Muskrat Falls. And if that’s your default starting position, there are lots of extra things to seize on right now, in the face of government cuts and a fiscal crunch.

The bottom line is that the government is going to be shelling out billions of dollars in the next five years to build a big dam in Labrador, at the same time that they’re laying off workers, cutting program spending and reigning in budget expenditures.

In the original post, I tried to explain the frightfully complicated accounting methods the government uses to manage the books. But the core point I was trying to make is that the deficit and Muskrat Falls are separate issues.

The provincial government currently has a structural deficit. That’s a big issue, and it’s one that we’re collectively going to have to deal with at some point. It’s up to you to decide how we go about doing that — raise taxes, cut spending, or some other magical solution.

But one thing that’s not legitimate is arguing that cancelling Muskrat Falls would reduce the deficit. Muskrat Falls is not a meaningful factor in the forecast deficit. It was zero per cent of the $726-million deficit that the government ran in 2012, and at most, it’ll be a fraction of the $1.6-billion deficit forecast for 2013.

If you oppose Muskrat Falls, good for you. After two years of grueling debate and public discussion, everybody in the province is entitled to their own opinion.

These are both major issues facing Newfoundland and Labrador. They’re issues deserving thoughtful debate and informed discussion. But they’re essentially unrelated issues. By comparing the two, and making it seem like Muskrat Falls spending is causing the deficit you’re misleading people and lowering the level of discourse in the province.

I hope that between this blog post, and my original piece on this issue, I’ve been able to explain the situation clearly. If you’ve got any thoughts or questions, I encourage you to leave a comment at the bottom of the story, or e-mail me at jmcleod@thetelegram.com.

 Thanks for reading. 

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Recent comments

  • dougie
    March 21, 2013 - 03:59

    Dwight who?

  • concerned
    March 19, 2013 - 10:44

    I am not sure this is entirely correct as well. The Muskrat Falls asset (LIL and Plant) will have to be revalued from time to time. This will have to be done in accordance with the International Accounting standards. The value should not be dependent upon a monopoly entrenched in law (Bill 61) but fair market price on the asset. With current electricity rates this would be about 1/2 what the cost of the asset will be to build. So if the procince is following international accounting standards or the Generally Accepted Accounting Practices of Canada, the value of the plant will not always be the original construction value. Furthermore, the government will have to depreciate the asset. As the MF plant will not follow a Cost of Service approach, it will be depreciated (assuming linear depreciation) faster than the principal will be paid off. This difference should also show as a liability on the balance sheet. So you are correct, the full 8 billion will not appear on the books, but the interest on the equity loan, and the difference between asset value, should both. The department of finance should state what both of these are. However, I do not know how any accoutant could say the book value of this asset on the open market will equal the construction cost. It must be remembered that accounting rules are different for commercial plants, than general public works projects.