Money crunch

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It might not be a great year to be the finance minister in this province. In fact, it might be a rotten year to hold the job. For years, finance ministers have had to decide how much more to spend — successive surpluses, all powered by oil dollars, have seen provincial expenditures grow every single year.

But this year, the oil tide has turned. Lower prices than the government expected, and lower production as well, has left a big fiscal hole.

Now the minister will have to find millions upon millions in savings from government departments that have far more experience in recent years in growing than in shrinking.

But even as the Finance Department looks for savings, there are considerable new costs on the horizon.

First, there’s the ramping-up of spending for the Muskrat Falls project. Under the terms of the federal loan guarantee, the province actually has to put up equity before borrowing money with federal backing for the project.

Likewise, there’s about to be $700 million or so in spending for the province’s share of the development costs for the Hebron project. That’s the portion of Hebron construction costs that the province is responsible for as a result of its 4.9 per cent equity stake. Hebron expenses have grown considerably in the past five years, rising from $5 billion to $8.3 billion to $14 billion.

The government would argue that, in the long term, both of those expenditures are good investments: Muskrat Falls, because all of the money sunk into the project (and profits as well) will be recovered from the province’s electricity users, and Hebron because the ownership stake will result in a share of the project’s profits, as well as (eventually) royalties. (We say eventually because the project will operate under a particularly low royalty regime until the $14 billion in construction costs has been recovered by the project’s investors.)

While the proof of that pudding will certainly be in the eating, one thing is certainly true: at a time when the provincial government is already saying that it can’t afford the costs of current services — in fact, forecasting a single-year deficit this year alone of three-quarters of a billion dollars — there are going to have to be significant up-front cash outlays.

And there’s not a heck of a lot left in the kitty to cover those costs.

And that means that instead of turning on the fiscal taps, the Finance Department and its minister are going to have to find a way to turn them off. It’s something this administration has little experience doing — and it’s going to happen right in the middle of another complicating factor: negotiations with the province’s public sector unions.

It is a fiscal reckoning that many in this province have been warning the government about for years — but the Dunderdale administration, and the Williams government before that, preferred paying lip service to even the smallest vestiges of restraint than to making hard choices.

It’s not going to be fun times in the Finance Department.

Organizations: Finance Department

Geographic location: Hebron

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Recent comments

  • Pierre Neary
    January 09, 2013 - 15:55

    The Hebron Deal was in my opinion was Mr. William's best move as our Premier. There wasn't to much smoke and mirrors and in the end it was a good deal for the province. MF remains to be seen. Two totally different deals.

  • Cold Future
    January 09, 2013 - 12:15

    There is little to compare between Hebron and Muskrat.At Hebron we are only taking 4.9% of the risk. So there is a very strong incentive for the prvate partners with 95 % of the risk to make it a success which will add to the NL coffers. Muskrat on the other hand puts 100% of the risk and cost directly on to the backs of the ratepayers. Hebron will have a pay back of about 5 to 8 times the expenditures over its life from money earned from selling the products.Muskrat on the other hand has no pay back since its product has to be sold at discounted rates on the mainland. These rates will be subsidized by the ratepayers locally.The good thing about Hebron is that the profit and royalties will allow the government to provide subsidies to the NL ratepayers who will not be able to heat their homes because the increased rates which will be required to pay down the debt for Muskrat.

  • concerned
    January 09, 2013 - 07:22

    The Muskrat Falls investment, the Hebron investment, the White Rose investment and the Hibernia South investment of cash is all happening now. Meanwhile the royalties from Hebron will be deferred, and other royalities diminishing. The return on investment is one factor (Hebron may be a good investment) but cash flow is another far more important one. When the idea of Nalcor was launched oil traded at 150 $/barrel, Muskrat cost 5 Billion, and Hebron 8. Project costs have soared, while the price of oil dropped 30%. This is the perfect storm for extremely large deficits. We are about to pay for our 5 years of government lagresse. The basic question is what is the provinces rate of return on these oil investments?

  • Maurice E. Adams
    January 09, 2013 - 07:10

    And Muskrat Madness continues.