Atlantic Insight

About Atlantic Insight

Atlantic Insight, by southeast New Brunswick's W.E.(Bill) Belliveau who analyzes and comments on matters of public policy and the social and economic decisions taken, by all levels of government from local to global. Atlantic Insight Blog is a commentary on current affairs and changes in the marketplaces and/or in the business world. The impact of policy, decisions and changes are explored for their impact on the citizens of Atlantic Canada. You are invited to add your comments.


Saturday, January 30, 2010

Leading a nation that doesn’t want to be led...

A leader with vision and passion can transform a division, a corporation or a nation. Unless you are sometimes prepared to change everything, you may end up with nothing. If you have to force a decision, the decision probably should not yet be made, so says Sheelagh Whittaker, former chief executive of EDS Canada Inc. - on leadership, as published this week in our national newspaper.

Barrack Obama might take note.

On January 19th, the Democrats lost a Massachusetts senate seat to Republican Scott Brown. It had been a Kennedy-family fiefdom for more than fifty years, considered one of the safest senate seats in all of the United States for Democrats.

Early polls had shown Democrat Martha Coakley far ahead of Brown. The Democrats had supported Obama with a 26 point vote margin just 14 months earlier. The assumption of an electoral cake-walk, a series of campaign blunders and a sour national mood undid Coakley as she was overtaken by Brown in the final days of the campaign.

The Massachusetts upset is significant because it reduces the Democrat majority in the senate from 60 to 59. In the U.S. Senate, it takes 60 votes to break a filibuster (the use of extreme delaying tactics in an attempt to prevent action). This 60-vote convention (a basic agreement between parties concerning procedure) is not a regulation or a law but it has often been used and most likely will now be used to frustrate the will of the majority of senators who support healthcare reform.

It appears that Obama misread the national mood. Having gained the presidency on a promise of change, he mistook his win for a mandate. He had his sights on the transformation of American society. For most Americans, social revolution was the last thing on their minds. They wanted change in the process of government, blaming the failed policies of the Bush years on the glaring defects of a political process dominated by special interests and partisan bickering.

It appears that most Massachusetts voters believed the President was preoccupied with passing a health-care-reform package that focuses too much on extending coverage to the 15% of Americans who are uninsured and too little on out-of-control medical costs (translation: rising insurance premiums) for the 85% who already have insurance.

For the majority of voters, there was no short-term health-care crisis – only a long term (fiscal) one – a raging recession and 10% unemployment - the issues that mattered most to them. It’s clear that Obama heard the message but in a defiant State of the Union speech this week, he promised to continue his fight for healthcare reform even as he turns his attention to employment and job creation.

Some people speculate that the Republican win in Massachusetts was the best thing that could happen to health-care reform. Before the 19th, the left was increasingly despondent about reform. The political process and all the compromises and trade-offs had transformed Obama's signature policy into an awkward hodgepodge of intentions and priorities. The Senate bill in its present form represents nobody's dream for reform but it may be what is possible, given the U.S. political process.

Even if the Democrats’ base isn't particularly fond of the reform package, they clearly understand how close they are to getting no reform at all. The loyalists who Obama will need to pound pavements in November's mid-term elections could be far more energized by this new narrative than they would have been had Coakley been elected and reform negotiations continued to drag on for months.

The health-care crusade has cost Obama support, particularly among independents. In 2008, he won a majority of independents by promising to reform the way government worked: to make it more "transparent" and clean, more logical and brainy, less influenced by big money and old ideological thinking. It seems that was a pipedream.

A recent 5-4 decision of the U.S. Supreme Court throws a monkey-wrench into plans for government reform. The Court decision removes all limits on political contributions and permits unlimited spending by corporations, unions and non-governmental groups on grounds of free speech. Americans are rightly concerned about the glaring partisanship of the decision – five Republican-appointed judges v. four Democrat appointees, all voting according to party affiliation, as they did in 2000 when George W. was handed the presidency after losing the vote count to Al Gore by half a million votes.

If the Court’s decision stands without congressional challenge, it will encourage more lobbying, more fundraising, more (attack) advertising and more pressure on politicians to follow the dictates of their most moneyed donors. Mr. Obama’s push for reforms that would bring healthcare to 46 million Americans who now live without health insurance could indirectly be derailed by the decision.

W.E. (Bill) Belliveau is a Shediac resident and Moncton business consultant. He can be contacted at bill.bellstrategic@nb.aibn.com



Advertisement




Saturday, January 16, 2010

The Meaning of Prorogue...

Webster defines the word “prorogue” as termination of a legislative session of the British parliament by royal prerogative. In Canada it means the same thing if we substitute the words royal prerogative with the words “the Governor General, at the request of the Prime Minister”.

Prorogation is not a new thing, so why all the fuss? A year ago, the Governor General prorogued parliament when the Prime Minister was on the verge of losing power in the House of Commons. This time he says he needs time to ‘recalibrate’ his economic policies. A few nights ago, Tom Flanagan, political scientist at the University of Calgary and former chief of staff to Prime Minister Stephen Harper, told Evan Solomon on CBC Television “that the government's talking points (on this matter) really don't have much credibility. Everybody knows that Parliament was prorogued in order to shut down the Afghan inquiry and the trouble is that the government doesn't want to explain why that was necessary”.

A letter published earlier this week in the Ottawa Citizen, by Daniel Weinstock of the Université de Montréal and 170 Canadian academics says "The Prime Minister's actions risk setting a precedent that weakens an important condition of democratic government -the ability of the people, acting through their elected representatives, to hold the government accountable for its actions."

"It's yet another step in a pattern of leadership and governance by Prime Minister Harper that is authoritarian in direction," said Peter Russell, a constitutional scholar at the University of Toronto. "He seems to want to minimize his exposure to critical review. And I think that's a very dangerous thing."

An e-mail reported from Donald Savoie, Canada Research Chair in Public Administration and Governance at the Université de Moncton and one of the leading authorities on the powers of the prime minister says “Everyone should take a valium”. He said “the issue of the role of Parliament, the Prime Minister and Cabinet requires a fundamental rethink. If one is after big game – and the role of Parliament in my view is big game – one should not be sidetracked by a rabbit.”

Rabbits, notwithstanding more than prorogation seem to be at play here. Mr. Harper and his Cabinet emissaries have a history of smearing opponents, shutting down committees, cutting off information channels, pouring distain on public concerns and firing public servants who don’t agree with them. Think of Richard Colvin, the Canadian diplomat who served in Afghanistan and testified before a Parliamentary Committee about suspected Afghan tortures. Think of former Canadian Nuclear Safety Commission President Linda Keen, Canadian Wheat Board Vice-President Deanna Allen, Military Police Complaints Commission Chairman Peter Tinsley, Canadian Council on Learning President Paul Cappon and others.

The next one to go could be Canada’s Budget Watchdog, Kevin Page. Earlier this week, he said that Canada is teetering on the brink of an economic chasm as debt continues to pile up. Page predicted that by late 2013, when the economy will be back at full capacity, the federal government will still have a deficit of nearly $20 billion, more than $8 billion higher than Finance Minister Jim Flaherty's forecast and it could last well into the future. We have to start dealing with a ‘structural’ fiscal problem that's going to get bigger and bigger “said Page.

Mr. Page said the federal government is faced with the unpalatable task of cutting spending and raising taxes in order to get Canada back to normal. Paul Martin recognized that reality in the 1990s. Finance Minister Flaherty has suggested that government can rebalance Ottawa's books over time without raising taxes or slashing federal spending programs. He says that the deficit can be phased out by retarding the growth in Ottawa's spending. Many economists are skeptical.

Prime Minister Harper brushes off criticism of his decision to shutdown Parliament, calling the move a ‘routine’ procedure that will enable the government to "recalibrate" its agenda. In his first public remarks since the decision, the Prime Minister conceded that one of the factors in his decision to prorogue was the ability for more/new Conservative senators to take their seats once the new session begins in March, thus allowing the Tories to finally outnumber the Liberals in the Upper House. Harper has long complained that the Liberal-dominated Senate has been holding up government bills. The new senators will have lots of time to get used to their news seats because all those government bills have been scrapped as a result of prorogation

Mr. Harper’s need to recalibrate his economic agenda seems ominous. Is he going to return to Parliament with heavier taxes and a lighter crime package or is he simply going to focus on senate reform and the battles of constitutional change? Time will tell.

W.E. (Bill) Belliveau is a Shediac resident and Moncton business consultant. He can be contacted at bill.bellstrategic@nb.aibn.com



Advertisement




Saturday, January 09, 2010

The Financial Implications of NB Power Sale...

Those who criticize the potential sale of NB Power use words like loss of a natural resource, loss of a valued asset, loss of sovereignty. In my view, those terms are all code for anti-Quebec feelings. That view aside, let’s take a look at the realities.

The only natural resource involved in this deal is the St. John River which hosts a couple of hydro-electric dams, including Mactaquac. All the rest of New Brunswick’s electricity is generated by burning uranium and/or fossil fuels like coal, oil, Orimulsion (until June 2010) and natural gas. NB Power is almost totally dependent on foreign-sourced fuels for the generation of its electricity. They come from Saudi Arabia, Algeria, Venezuela and Columbia. The countries of origin are hardly bastions of dependability or price stability. We also import uranium from Ontario.

Now in terms of the financial viability of NB Power, let’s take a look at some facts. NB Power’s combined financial statements for 2008/09 list assets valued at $5.190 billion and liabilities (debt) of $4.885 billion. Shareholder equity is a paltry $305 million or .0587% of the total asset value. That’s just about enough to qualify for a sub-prime housing mortgage in the United States. If that doesn’t shake you, consider that NB Power’s revenue of $1.453 billion generates a measly $104 million return after expenses and before taxes or payments in lieu of taxes. That’s .0715% of revenues.

NB Power’s circumstance today does not take into consideration the fact that over the next 20-25 years much of its generating capacity will have to be replaced at an estimated cost of $10 billion. The corporation’s current earnings would not support that type of investment. Even if NB Power could borrow the $10 billion, it could not afford the $600 to $700 million a year in interest payments without major, major rate increases.

Critics of the NB Power deal have suggested that the purchase price offered by Hydro Quebec is too little. The offered price of $4.8 billion plus a rate reduction package worth another $5 billion seems like a lot of money to me for an asset whose net worth is recorded at $305 million.

So what is NB Power’s real value? A buyer’s valuation of a business is usually quite different from what a seller believes the business is worth. Sellers tend to be emotionally attached to their business. There are several ways to value a business including: (i) asset valuations that arrive at an appropriate price (ii) liquidation value i.e. the value of a company’s assets if it were forced to sell all of them in a short period of time, usually within twelve months and (iii) income multiples where the earnings of a business are subjected to a multiple to arrive at a sale price. If you accept the value of Hydro Quebec’s offer at $9.8 billion, the earnings multiple would be 94. That would be phenomenal but Barron’s the U.S. Financial Magazine says regulated utilities are only trading today at 12 times projected 2009 profits.

A major consideration when calculating the value of a business is the projected Return on Investment (ROI) that the buyer can expect to achieve. Most investors look at minimum returns of 25%. Some will go as high as 35% to 50%. In 2008/09, NB Power produced net earnings of $104 million. If Hydro Quebec multiplied that return by a factor of twelve, the purchase price would only be $1.248 billion. Unless they increased NB power’s earnings significantly, it would take about fifteen years to recover that type of investment and earn a minimum return of 25%. I think we have established that NB Power has no significant value based on assets or earnings so clearly the value must be in the projected ROI for Hydro Quebec.

Venture capitalists generally look for payback in five to seven years. To achieve that objective with the purchase of NB Power, Hydro Quebec would have to use the purchase to gain additional access to the $40 billion New England market. Herein lays the real value of NB Power – its transmission lines and its access to the United States. Assume $10 billion in new revenue for Hydro Quebec. That would increase the value of its exports by almost 50%, enable recovery of their investment in NB Power and produce a minimum 25% return in about five years.

To those who ride the emotion of opposition to Hydro Quebec, including David Alward, I ask what is an affordable cost for preserving the notion of ownership for NB Power? Remember, shareholder equity in the Provincially-owned Corporation is less than 6% of its $5.19 billion asset value. The company is highly vulnerable to increases in oil prices and the need to replace generating assets. Shareholder equity in Hydro Quebec is 54% of its $66.8 billion asset base. If you were depositing your life savings and these two utilities were banks, where would you put your money?

W.E. (Bill) Belliveau is a Shediac resident and Moncton business consultant. He can be contacted at bill.bellstrategic@nb.aibn.com



Advertisement