Royalties are only part of the equation

This was published as a forum peice in the Telegram today.

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I have to respond to a recent Telegram column by Brian Jones called “Oil rich but dirt poor — what’s wrong with this picture?” (June 15). He argues that provincial governments from 1989 to 2003 were exclusively fixated on natural resource jobs to the detriment of natural resource royalties, and that royalties are the only way to accumulate wealth for the province.

I don’t have to trawl through every ministerial speech and statement or Hansard record for the time period he offers to show his statement is ridiculous. It should suffice to point to the latest provincial budget, which forecasted total direct revenues from offshore projects of over $1.25 billion this fiscal year, including over $1 billion in royalties alone.

Those funds, 21 per cent of total government revenues, come from projects for which negotiations concluded in the period 1989-2003. So, clearly somebody in those governments talked about royalties at some point.

Oddly, while this government has gone to war over an equity stake it doesn’t need — holding up a project we do need — it has been largely silent on the issue of economic development benefits and the associated employment opportunities.

As for his bald statement that “jobs are fine but real wealth comes from royalties, as any redneck can tell you,” Mr. Jones is dead wrong.

Royalties alone do not create provincial wealth; royalties increase government cashflow and provide cash for government spending and government jobs. But all that stops as soon as the royalties dry up.

Real wealth comes from building capital: human, physical and economic.

Human capital develops when local businesses and workers gain experience on one project and then apply that experience to other projects. Those workers at Bull Arm bought houses, cars, raised their children and fed their families on exceptional wages while gaining invaluable expertise and experience they can use anywhere. They accumulated wealth and the potential to earn more of it in the future.

We build physical capital when we construct infrastructure that can be used for other projects, here and around the world. The Bull Arm fabrication facility is an excellent example.

It would be nice to see a local equivalent of the Alberta multibillion-dollar Heritage Fund, and I strongly support that. We need to accumulate lasting economic wealth from this non-renewable resource. Right now, it all goes into general revenues with nothing put aside for the future.

When Mr. Jones and others argue for an equity stake by saying that our contribution to future projects is the simple ownership of the oil resource, they are partly right. In the same way you own a building and somebody wants to put in a store, you want to be compensated for that. But the benefit you extract from the ownership of the building is not an automatic equity stake in your tenant; it is rent. In the case of the oil resource, rent is called royalties.

We should note that the Alberta Heritage Fund was created with royalties and not from provincial equity stakes. Alberta does not own an oil company (they divested decades ago), nor does it hold equity stakes in local projects.

That government has to be front and centre and directly involved as an equity partner in industrial activity is a quaint point of view that has been thoroughly discredited in most parts of the industrialized world.

And that includes Norway, this government’s stated model for involvement in the oil industry. Over the last five years, the Norwegian government has been gradually divesting itself of its stakes in Statoil and NorskHydro.

Experience shows that the government has a poor track record in managing private-sector activities. Just look at the very long list of Smallwood/Peckford industrial schemes ranging from chocolate to boots to cucumbers to orange juice.

And I don’t mean to pick on the Newfoundland and Labrador governments in particular. Look across Canada and see the expensive skeletons of failed provincial government industrial projects of all kinds, from the Bricklin factory in New Brunswick to the fast ferries of B.C.

This province needs royalties for the government to function and to benefit the population as a whole. The people of this province need the business activity, jobs, skills, expertise and other opportunities the resource provides to be competitive in the wider world and to take advantage of local projects in the future.

We need them both — royalties and jobs. That’s how we accumulate wealth.

Editorialist, heal thyself

Today's column from Brian Jones is a peculiar one. For the first 7/8's or so, he excoriates the Liberal opposition, lambasting them not reforming their give-away mentality, most notably demonstrated through Voisey's Bay.

Oddly, he can't seem to provide any real evidence for that "giveaway" other than repeating the same old hoary Williams government unexamined claim that it is one.

He also conveniently ignores that all the millions upon millions of dollars flowing into the provincial treasury every year, the same millions which allow this government the financial cushion to turn their back on new projects, were negotiated under Liberal governments.

Are the Liberal taking the political hit in this new "No Giveaways" public environment? They certainly are. But the problem with this "No Giveaways" public environment is that it is unsustainable for the province.

First, the position is predicated on a negative. What government claims as their guiding principle is the equivalent of "We won't do stupid things." And that's great, as fine as it goes. Not doing stupid things is a fine and laudable goal. No government wants to do stupid things and no government comes into office planning to do stupid things (with rare exceptions like the Khmer Rouge or the Ontario NDP).

Second, there is only one way to not do stupid things and that's to do nothing at all. As long as official government policy is to fight fight fight no matter what, then there really is no chance of committing to anything stupid.

There is also no chance of committing to anything smart.

Third, as long as government is rewarded for the fight fight fight and enough people of the province feel no cost to that fight, then government will keep it up.

Finally, fighting is easy because it involves making no choices. While fighting makes you popular, making deals means give and take and choosing among what's the most important. Hibernia made the choice of balancing infrastructure development (Bull Arm) and jobs (gravity base) and put off royalties; Terra Nova chose higher and more immediate royalties and lower local job activity.

Voisey's Bay also entailed a delicate balance of choices.

It's too easy to assail Hibernia for low royalties while ignoring the development of world-class infrastructure and the thousands of jobs it created just as it's too easy to lambaste Terra Nova for the engineering jobs that never came while ignoring the steady flow of funds into the provincial treasury.

It's easy and it's cheap. And it happens all the time from people who should know better.

Fighting for everything at once means never having to choose. And making choices and balancing off rewards means spending political capital; and this government is a miserly one.

Mr. Jones ends his editorial with these lines:

The premier has achieved almost rock-star status, even though he's only half right in the ongoing Battle of the Atlantic Accord. Like too many others, the Liberals opted to become Williams' cheerleaders on that issue, instead of challenging him to produce some hard facts and numbers to support his case. They seem to be afraid to challenge the accord hysteria and Dannymania that has gripped the province.

Out of touch, and gutless to boot - it doesn't sound like a winning platform.

Of course Mr. Jones has already acted as a Williams cheerleader in virtually every paragraph in his piece up to that point. At no point does he ask any hard questions preferring instead to swallow the government bait whole.

And then he criticizes the opposition for doing the same and for refraining from issuing the challenge that Mr. Jones himself cannot issue?

The point missed is that as long as the public environment leans towards taking government at it's word without critical analysis and generating and reinforcing myths and revisionist history thereby creating an attitude which encourages a socially enforced consensus (speaking with one voice), opposition comes at a cost.

It's a political cost and it's a personal cost. After a while, even the strongest get fed up with speaking out with only bricks to the head for acknowledgement.

That doesn't mean that there should be no legitimate opposition and responsible alternative point of view. It just means that the province is not ready to listen to one yet.