The Atlantic Accord Negotiations The Atlantic Accord Negotiations –– Trying to Understand What was Trying to Understand What was Offered and What We AcceptedOffered and What We Accepted

A Presentation byA Presentation byDr. Wade LockeDr. Wade Locke

February 2, 2005February 2, 2005

What is EqualizationWhat is EqualizationFormulaFormula--driven, unconditional grant introduced in driven, unconditional grant introduced in 19571957Based on Representative Tax SystemBased on Representative Tax SystemRenewed every 5 years (2004 last renewal)Renewed every 5 years (2004 last renewal)Atlantic Accord signed in 1985Atlantic Accord signed in 1985Generic Solution in 1994, retro to 1993Generic Solution in 1994, retro to 1993Bill C24 in 2004 overrides formula (transitional)Bill C24 in 2004 overrides formula (transitional)Expert Panel to be named and make Expert Panel to be named and make recommendations by end of 2005recommendations by end of 2005

Bill C24 and Expert PanelBill C24 and Expert Panel

Bill C24 overrides the equalization formula for Bill C24 overrides the equalization formula for 20042004--05 and 200505 and 2005--06 by fixing entitlements06 by fixing entitlements

20042004--05 05 -- NL’s entitlement set at $761 MNL’s entitlement set at $761 M

20052005--06 06 –– NL’s entitlement set at $861 MNL’s entitlement set at $861 M

No longer equalization and there is zero claw No longer equalization and there is zero claw back in these two yearsback in these two years

Transitional Transitional –– expected two years onlyexpected two years only

awaiting report of Panel of Expertsawaiting report of Panel of Experts

Equalization Equalization –– What Have We Received?What Have We Received?

$0

$200

$400

$600

$800

$1,000

$1,20019

58

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Mill

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$23 B Cumulative20-30% of Gov. Rev.

How Does Equalization work?How Does Equalization work?

$4,914

$1,304

$674 M

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Dol

lars

Per

Cap

ita

$0

$100

$200

$300

$400

$500

$600

$700

$800

Mill

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517,256Population

Equal. Standard $6,217

OwnSource

Shortfall

Entitlement

What is an Equalization claw back?What is an Equalization claw back?($300 Million in Offshore Revenue)($300 Million in Offshore Revenue)

$4,914

$580

$723

$374 M

$300 M

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Dol

lars

Per

Cap

ita

$0

$100

$200

$300

$400

$500

$600

$700

$800

Mill

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517,256Population

Equal. Standard $6,217

OwnSource

Shortfall

Entitlement

IncreasedCapacity

Claw Back

The Atlantic AccordThe Atlantic AccordGave the province the right to tax the offshore resources as if Gave the province the right to tax the offshore resources as if they were on provincial land they were on provincial land

provided offset payments to mitigate equalization claw back provided offset payments to mitigate equalization claw back for 12 years from 1999for 12 years from 1999--00 to 201000 to 2010--1111

Part IPart I –– ensures that equalization plus Part I payments do ensures that equalization plus Part I payments do not fall dramatically from between adjacent years not fall dramatically from between adjacent years (percentage protection determined by relative fiscal capacity)(percentage protection determined by relative fiscal capacity)

Part IIPart II –– ensures province is compensated for percentage of ensures province is compensated for percentage of any decrease in equalization entitlements plus Part I paymentsany decrease in equalization entitlements plus Part I payments

Atlantic Accord Offset percentagesAtlantic Accord Offset percentages

Part IIPart IPart IIPart I

0%2011

10%85-95%201070%85%2004

20%85-95%200980%90%2003

30%85-95%200890%95%2002

40%85-95%200790%95%2001

50%85-95%200690%95%2000

60%85-95%200590%95%1999

Illustration First Payments under AccordIllustration First Payments under Accord

Entitlements in 2000/01 were Entitlements in 2000/01 were $1,112 M$1,112 MEntitlements in 2001/02 were Entitlements in 2001/02 were $1,055 M$1,055 MOil Revenue $52 M in 2001/02Oil Revenue $52 M in 2001/02

________________________________________

Part I Base = 95% * Part I Base = 95% * $1,112M$1,112M = = $1056.4 M$1056.4 MPart I Payment = Part I Payment = $1,056.4 M$1,056.4 M -- $1,055 M$1,055 M = = $1.4 M$1.4 MFall in Part II Base = Fall in Part II Base = $1,112 M$1,112 M –– 1,055 M1,055 M -- $1.4 M = $1.4 M = $55.6 M$55.6 MPart II Payment = 90%* Part II Payment = 90%* $55.6 M$55.6 M = = $50 M$50 MTotal Payment = Total Payment = $1.4 M$1.4 M (Part I)+(Part I)+$50 M$50 M (Part II)(Part II)

= = $51.4 M$51.4 M

What is the Generic Solution?What is the Generic Solution?

Applies when an equalizationApplies when an equalization--receiving province has in receiving province has in excess of 70% of the total equalization base in the country. excess of 70% of the total equalization base in the country.

Only 70% of the revenues of all provinces for that base are Only 70% of the revenues of all provinces for that base are included in calculating equalization. included in calculating equalization.

This is the often cited 70% claw back for oil and gas. This is the often cited 70% claw back for oil and gas.

In any given year, the provincial government can choose In any given year, the provincial government can choose the Generic Solution in lieu of the Atlantic Accord.the Generic Solution in lieu of the Atlantic Accord.

What are offshore revenues?What are offshore revenues?

Offshore revenues are not just royalties include:Offshore revenues are not just royalties include:RoyaltiesRoyaltiesDirect Provincial Corporation Income TaxesDirect Provincial Corporation Income TaxesSales TaxesSales TaxesBonuses and rentalsBonuses and rentalsOther feesOther fees

Offset Payments & Generic SavingsOffset Payments & Generic SavingsHow have we done so far? How have we done so far?

$567 M$660 MSum

$102 M$232 M20042004$218 M$195 M20032003$176 M$115 M20022002$51 M$52 M20012001$14 M$46 M20002000$6 M$20 M19991999

Offset Payments & Savings Under

Generic Solution

Oil

Revenues

So what is the problem?So what is the problem?

Received $660 M in revenueReceived $660 M in revenueLost only $90 MLost only $90 MOnly 14% claw backOnly 14% claw back

This is about to get much bigger!This is about to get much bigger!

Provincial Revenue ProfilesProvincial Revenue Profiles(No Hebron)(No Hebron)

$0

$200

$400

$600

$800

$1,000

$1,20019

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2001

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0

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20

30

40

50

60

US

$ pe

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arre

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Prov Revenue Oil Price (US $)

$6.7 B Revenue 1999-2020$6.2 B Revenue 2004-2020

Revenue

Oil Price

So what is the problem?So what is the problem?(No Hebron)(No Hebron)

-600

-400

-200

0

200

400

600

800

1000

1200

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

Offshore Revenue Net Revenue Losses After Floor Provisions

What is the Problem?What is the Problem?

$2.5 B$2.3 B$0.8 B$0.7 B$6.2 B2004-20

$0.8 B$0.4 B$1.2 B2013-20

$1.7 B$1.9 B$0.8 B$0.7 B$5.0 B2004-12

Claw back

Accord

Generic

Bill C24Equal.

Floor

Revenue

What did the province want?What did the province want?

June 10June 10thth –– the province the province “receive 100% of net “receive 100% of net direct provincial offshore revenue from these direct provincial offshore revenue from these resources after the impact of the resources after the impact of the equalization program is taken into account”equalization program is taken into account”

Also, the Atlantic Accord Also, the Atlantic Accord ““be replaced by a new be replaced by a new offset provision continuing over the life of offset provision continuing over the life of the offshore petroleum production…the offshore petroleum production…””

What did the federal government offer in October?What did the federal government offer in October?

1.1. LumpLump--sum payment of $1.4 billion over the period sum payment of $1.4 billion over the period 20042004--05 to 201105 to 2011--12 ($175 M per year for 8 years)12 ($175 M per year for 8 years)

2.2. Annual payments to ensure that province retains Annual payments to ensure that province retains 100% of offshore, subject to condition that fiscal 100% of offshore, subject to condition that fiscal capacity of province not exceed that of Ontario in capacity of province not exceed that of Ontario in any yearany year

-- Where fiscal capacity is determined by ownWhere fiscal capacity is determined by own--source source revenues, equalization and any offset paymentsrevenues, equalization and any offset payments

What was the October offer worth at What was the October offer worth at that point in time?that point in time?

NL ownNL own--source fiscal capacity per capita $4,900, source fiscal capacity per capita $4,900, Equalization entitlement $675 millionEqualization entitlement $675 millionStandard per capita entitlement $6,220Standard per capita entitlement $6,220Ontario per capita entitlement $6,670Ontario per capita entitlement $6,670Extra available to province Extra available to province -- $450 per capita$450 per capitaProvince’s population 517,256Province’s population 517,256Implies so any revenue over $240 M puts NL over Implies so any revenue over $240 M puts NL over Ontario standard)Ontario standard)

What was the October Offer Worth?What was the October Offer Worth?(No Hebron)(No Hebron)

-1000

-800-600

-400-200

0200

400600

8001000

120020

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2005

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Incremental Oct Accord/Generic Claw Back 100% Revenue

What was the October offer worth?What was the October offer worth?

$1.7 B$3.0 B$0.7 B$2.3 B$6.2 B2004-20

$1.0 B$0.5 B$0.5 B$1.5 B2012-20

$0.7 B$2.5 B$0.7 B$1.8 B$4.7 B2004-11

Claw back

(Adjusted)

OffsetIncrem.

October

AccordRevenue

What did the federal government offer in What did the federal government offer in December Draft Agreement in Principle?December Draft Agreement in Principle?

1.1. additional payments to provide 100% offset against additional payments to provide 100% offset against reductions in Equalization payments resulting from reductions in Equalization payments resulting from offshore revenues (2004 offshore revenues (2004 --2011)2011)

2.2. After 2006, if province no longer qualifies for After 2006, if province no longer qualifies for equalization, then additional offsets disappear (left equalization, then additional offsets disappear (left with the Accord or Generic if relevant)with the Accord or Generic if relevant)

What did the federal government offer in What did the federal government offer in December Draft Agreement in Principle?December Draft Agreement in Principle?

3.3. A new arrangement may be renegotiated after 2011 for A new arrangement may be renegotiated after 2011 for another 8 years (2012another 8 years (2012--2019)2019)

4.4. The new arrangement would require that province The new arrangement would require that province 1.1. maintain balanced budget for each year of the new agreement,maintain balanced budget for each year of the new agreement,2.2. qualify for equalization in that year or previous year,qualify for equalization in that year or previous year,3.3. debt to GDP not fall below a province that is not party to the debt to GDP not fall below a province that is not party to the

agreement. agreement.

Violating either constraint terminates the agreementViolating either constraint terminates the agreement..

5.5. Also, possibly a new 8 year agreement for HebronAlso, possibly a new 8 year agreement for Hebron

Issues with respect to December Issues with respect to December Agreement in PrincipleAgreement in Principle

Is it possible that we might not qualify for equalization after Is it possible that we might not qualify for equalization after 2006 2006 –– Yes, depends on oil prices & other things going Yes, depends on oil prices & other things going on in the provinceon in the provinceProvince must maintain balance budget to extend agreement Province must maintain balance budget to extend agreement –– No government can commit itself and future No government can commit itself and future governments to that constraintgovernments to that constraintDebt to GDP stay above other provinces Debt to GDP stay above other provinces –– that may not be that may not be a binding constraint, but it is not so implausible as to a binding constraint, but it is not so implausible as to dismiss out of handdismiss out of handNot qualify for equalization in 2 consecutive years Not qualify for equalization in 2 consecutive years –– this is this is not likely to be binding either, but it certainly is possiblenot likely to be binding either, but it certainly is possibleExpert Panel Recommendations Expert Panel Recommendations –– bbig uncertaintyig uncertainty

What was the December Offer Worth?What was the December Offer Worth?

$0

$200

$400

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$1,000

$1,200

$1,40020

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Equal W/O Oil Equal W Oil Payment

What was the December Offer Worth? (cont’d)What was the December Offer Worth? (cont’d)(Oil Revenue Overlaid)(Oil Revenue Overlaid)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,40020

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Equal W/O Oil Equal W Oil Payment Oil Rev

What was the December offer worth?What was the December offer worth?

$2.8 B$5.1 B$1.4 B$2.3 B$6.2 B2004-20

$1.1 B$1.5 B$0.4 B$1.5 B2012-20

$1.7 B$3.6 B$1.4 B$1.9 B$4.7 B2004-11

Increm

Payment

PaymentFloor

Bill C24

Accord

Generic

Revenue

So Why Wasn’t this Acceptable?So Why Wasn’t this Acceptable?

UncertaintyUncertainty

Debt to GDP condition could have been violatedDebt to GDP condition could have been violatedBalanced budget could have been violatedBalanced budget could have been violatedMight have been off equalization in 2006 or 2007, Might have been off equalization in 2006 or 2007, depending on oil prices, exchange rates and inflationdepending on oil prices, exchange rates and inflationPanel might change how equalization is calculated Panel might change how equalization is calculated ((egeg macro formula)macro formula)Generic Solution might be eliminated after the Panel Generic Solution might be eliminated after the Panel reportsreports

What was in the deal that was What was in the deal that was accepted in January?accepted in January?

100% protection against claw backs so long as receiving 100% protection against claw backs so long as receiving equalization (2004equalization (2004--2012)2012)UpUp--front payment of $2 B, as prepayment against future front payment of $2 B, as prepayment against future payments (represents minimum that can receive)payments (represents minimum that can receive)Existing provisions of Atlantic Accord retainedExisting provisions of Atlantic Accord retained8 year extension so long as receiving equalization in 20108 year extension so long as receiving equalization in 2010--11 11 or 2011or 2011--12 and per capita debt servicing costs does not fall 12 and per capita debt servicing costs does not fall below at least 4 other provincesbelow at least 4 other provincesTransition payments in the extension if become have province Transition payments in the extension if become have province (2/3 of previous payment in first year and 1/3 in second year)(2/3 of previous payment in first year and 1/3 in second year)

What was the January Offer Worth?What was the January Offer Worth?

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$1,000

$1,20020

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Equal Floor Accord/GenericAdditional Payment Oil Rev

What was the January Deal Worth?What was the January Deal Worth?

$2.8 B$2.5 B$2.3 B$0.7 B$6.2 B2004-20

$0.8 B$0.8 B$0.4 B$1.2 B2013-20

$2.0 B$1.7 B$1.9 B$0.7 B$5.1 B2004-12

Extra Payment

Claw back

Accord/Generic

Equal. Floor

Revenue

What was achieved in January deal?What was achieved in January deal?

Upfront payment worth about $350Upfront payment worth about $350-- 400 M 400 M - enhanced flexibility

Guaranteed minimum payment of $2 B Guaranteed minimum payment of $2 B - protects against price falls & large price increases

Balance budget and debt to GDP constraints Balance budget and debt to GDP constraints removed and replaced with per capita debt servicing removed and replaced with per capita debt servicing costs costs

- increases the probability that extension will be in effect for 8 years

Two year transition period Two year transition period - insurance against falling off a cliff

SummarySummary

$0 B$6.2 BDecember

$0 B$6.2 BJanuary

$1.7 B$4.5 BOctober

$2.5 B$3.8 BNo Deal

Clawed BackRevenues Retained

ConclusionConclusion

Each offer was an improvement over the Each offer was an improvement over the previous oneprevious oneThe latest deal improved on the December by The latest deal improved on the December by upfront money and reduced uncertainty.upfront money and reduced uncertainty.

Thank You