Here's to the crazy ones, the misfits, the rebels, the troublemakers, the
round pegs in the square holes... the ones who see things differently -- they're
not fond of rules... You can quote them, disagree with them, glorify or vilify
them, but the only thing you can't do is ignore them because they change
things... they push the human race forward, and while some may see them as the
crazy ones, we see genius, because the ones who are crazy enough to think that
they can change the world, are the ones who do.

Steve Jobs
US computer engineer & industrialist (1955 - 2011)

Sunday, March 4, 2012

Build It and They Will Come

2003 marked the official entry of Danny Williams as the Premier of Newfoundland and Labrador. I say official, because prior to 2003 Williams was behind the scenes engineering a revolution of sorts in the province. Through his personal and professional relationships with the likes of Brian Tobin (Liberal Premier) and Dean MacDonald (former business associate and then head of Newfoundland and Labrador Hydro) he began orchestrating the downfall of the Liberal Party and the rise of his Progressive Conservative Party.

His revolution was firmly based in Newfoundland nationalism, but its primary goal was economic development. A not-so-silent revolution of sorts. Tobin, MacDonald and Williams had a common goal in mind - develop Labrador as the mining mecca of Canada. To do this they had to create the conditions to attract foreign investment capital into the province. The common limitation to their goal was a lack of infrastructure. Labrador had the raw resource base, but lacked: rail capacity; ice-free sea port capacity; and plentiful cheap electrical power.

Tobin tried to satisfy the power need by entering into an agreement with Quebec's Lucien Bouchard to develop the Lower Churchill. The deal fizzled out. Tobin left office, and Grimes took over. Grimes reached a deal with Quebec to develop the Lower Churchill. Dean MacDonald, the head of Newfoundland Hydro resigned over it, and that deal fizzled. Williams took over, courted Quebec for a deal and then advocated the new, much reduced Muskrat Falls development. Not to be outdone, Quebec announced its own Plan Nord to develop its half of the Labrador trough and other areas of northern Quebec. Its stated goal: to develop the north for mines of all kinds. The cost: $85 billion at a minimum.

Tobin took over Thompson Consolidated and created a railroad as well, which he promised other mines in the area could use to ship their raw ore to port. That port is located in Quebec, and just a few weeks ago the federal government committed $55 million dollars to expand the port to handle iron ore exports to the markets of Europe and China. The last part of the puzzle is the power - Muskrat Falls.

Meanwhile, Williams has been busy as well. Since his premature resignation as Premier he announced a mega $5 billion development on the Avalon which basically aims to increase the size of the capital by the size of Gander. It all sounds exciting and positive - except for reality.

The problem is history, or perhaps the denial of history. Newfoundland's history over the last 40 years has been massive outmigration to Western Canada, massive growth of the gross public debt, a strong abhorance to "outsiders", and recently a massive infusion of oil revenues into capital projects rather than the retirement of debt. Williams plans stubbornly ignore all the lessons the rest of the world is currently being taught - that runaway public spending equals disaster. It ignores the effects of hyper inflation on housing markets, the resulting high consumer debt leveraged against those artificially inflated home equities, and the collapse when those artifically high priced homes meets the reality of people's ability to carry the debt. It ignores the lack of a properly trained work force to execute the grand design.

Williams and company ignore the lack of capacity, human and otherwise, to realistically carry off the plan. Their blind march toward profit ignores the peril at which they place the province's population and its debt load. It could be compared to putting 1000 volts through a breaker capable of handling 100. What happens? The breaker trips and there is no power. We've already just witnessed some of these trips: the loss of the $100 million Hebron module; and the shut down of the yards in Marystown. To put it simply, the eyes are bigger than the stomach. The skilled workforce does not exist. While Newfoundlanders are famous for being jacks of all trades, the problem is they are masters of few. Many of those with specific trades have left the province. They have bought homes out west. They have families there. Their children in many cases are born out west, and know nothing of Newfoundland other than Nan and Pop live there. They are not planning to return, no matter the spin, with the possible exception of some people coming back to retire. That is retire, and not to work.

A big reason for the workforce remaining in the west is frankly money. They  make more money out west, and their taxes are far lower - so they keep much more of that money. They aren't surrounded by the politics of Newfoundland that they understand all too well, and they do not want that life for their children.

Of course Newfoundland could look for new immigrants to the province, but there is a problem with that as well. Frankly, Newfoundlanders don't trust outsiders. People not born in the province are referred to as mainlanders, or come from aways (CFAs). The message: your not one of us. Not exactly the environment that will attract people to the province, and likely a primary reason why Newfoundland has historically been unable to hold onto those newcomers. A recent news article referred to the inability of the Clarenville area to keep new doctors beyond a year or two. The people responsible for recruiting doctors to the area stated that more Newfoundland trained doctors were needed as immigrants won't stay past two years. A better approach would be to change the attitudes of Newfoundlanders toward those new immigrants it will need just to survive - let alone grow.

Adding to the problem - the provincal government's 20% plus expansion of the civil service in the past 5 years. In a serious case of robbing Peter to pay Paul, the provincial government has flooded the ranks of the civil service denying manpower to the private sector. It has also increased its fixed expenditures to the point that cutting government spending will have to involve cutting jobs, which in turn will lead to labour unrest in the union dominated province.

Complicating all financial aspects of Newfoundland's ambition is the debt. Current annual interest payments on the debt are $890 million on average. By comparison, Saskatchewan, which shared top place for economic growth with Newfoundland in 2011 at  3.9%, had interest payments of just $405 million. Furthermore, its population is over twice that of Newfoundland. Bottom line is that while both provinces have seen record natural resource revenues in the last 5 years, one has paid its debt down significantly while the other has essentially spent the money as it has come in. Newfoundland's gross debt has actually increased over the last 5 years. The provincial government simply uses the value of new schools, hospitals, etc  and subtracts their value from the gross debt to come up with the "net debt". It reports that "net debt" has decreased, but in reality overall debt has continued to grow.

As if that were not enough, the offset payments to compensate Newfoundland for revenue losses on equalization, due to the new found oil wealth, end this year. That is going to cost the Treasury about $500 million a year as Newfoundland starts to finally pay the bill of a "have province". Then there is the renegotiation of the equalization agreements starting in 2013. The federal government has already indicated it will be cutting health transfer increases by 50% in the coming years. For a province that receives 23% of its revenues from the federal government these cuts directly affect the bottom line.

To say that Newfoundland and Labrador is chasing its own tail right now may be an understatement. Essentially Danny Williams and company have lit their own province on fire. A cocktail of massive public and private debt, hyperinflation in costs, below average wages, higher than average taxation, aging/declining population, lack of the necessary skilled work force, intolerance of newcomers, and a stubborn refusal to skillfully deal with any of it. The perfect storm of what you don't want happening to your economy.The same people who just years ago touted Ireland and Iceland, as examples of successful island nations taking the world by storm, now never mention them. Why not? Both places are now economic basket cases failed by their inability to see through their own hype. Failed by the fragility of the foundations their economies were based on. Here in Newfoundland, our political and business leadership have placed us on this same path. They tell us: "If we build it they will come." Will we be like the rest, and ignore our obvious limitations, with the same result?

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