Offshore Fiscal Fairness Campaign is About Canada's Vision and Honour
by John Crosbie

Until recently, Nova Scotia Premier John Hamm has been a single voice leading a determined campaign to get the Government of Canada to follow through on commitments it made in the 1980's. These commitments are contained in signed agreements which provide that benefits of offshore petroleum resources would be used to help his province catch up to national economic standards. Similar commitments were first made by the federal government to the Province of Newfoundland and Labrador in the Atlantic Accord signed in 1985.

The merits and principles of Premier Hamm's case are finally being recognized. It is not about changing the equalization formula to squeeze more funds out of the federal treasury, or to have a better deal than other equalization-receiving provinces. It is not about wanting more health or education transfers. It is not about special handouts for economic development.

The case for offshore fiscal fairness is about honouring agreements entered into by both Liberal and Progressive Conservative Governments of Canada. That intent was clearly stated in speeches by Prime Ministers Pierre Trudeau and Brian Mulroney; by Mines and Energy Minister Jean Chretien; and by myself as Minister of Finance, and later Minister of Justice. And more importantly, the intent is embedded in various agreements of the federal and provincial governments of the day.

Presently, Newfoundland and Labrador, and Nova Scotia receive approximately 20 cents of every offshore revenue dollar; while the Government of Canada receives 80 cents, including federal corporate income taxes. This is not the "principal beneficiary" outcome that had been promised.

Premier Hamm's efforts on this very important regional and national issue have been significantly enhanced in recent weeks by Premier Roger Grimes of Newfoundland and Labrador. The two provinces will prepare a joint presentation to the federal government on offshore fiscal fairness. Former Alberta premier Peter Lougheed, and current premier Ralph Klien, among other national leaders, have also publicly stated their support and agreement that the original intent of the two offshore accords be honoured, namely that the province adjacent to the petroleum resources should be the "principal beneficiary" of the benefits and revenues from these non-renewable resources.

Exactly what was said in the 1980's?

Nothing could be clearer. The intent of these agreements was and is that Nova Scotia, and Newfoundland and Labrador, should and would receive the revenues from their respective offshore resources until their economies were at least at the national average level. In fact, in most documents they will remain principal beneficiaries until they reached 110-140% of national standards, depending on certain circumstances.

Here are a few extracts from various parliamentary exchanges and the Offshore Accords themselves:

Pierre Elliott Trudeau, 16 July 1980: Reply in the House to John Crosbie-

"The commitment we have made regarding the offshore is that until the provinces with resources off their shores have reached the average income in Canada, we intend to see that they get the overwhelming part of the resources from the offshore."

Canada-Nova Scotia Agreement on Offshore Oil and Gas Resource Management and Revenue Sharing, March 2, 1982" (Enacted into legislation by the Government of Canada under Prime Minister Trudeau, and the Nova Scotia Government.)

*These revenues included basic royalties and progressive incremental royalties under the Canada Oil and Gas Act, provincial corporate taxes offshore, provincial retail taxes offshore, any bonus payments, and any net rentals and license fees offshore.

"Government of Canada (under Prime Minister Trudeau) Proposal to the Government of Newfoundland and Labrador on Offshore Oil and Gas Resource Management and Revenue Sharing, September 2, 1982"

Provisions for Wider Sharing

In the future, once Newfoundland and Labrador have benefited substantially from oil and gas production revenues, a wider sharing with all Canadians would take place. This broader sharing would take place only after the proposed "trigger" has been reached. The "trigger" measures the economic well-being of the province using the following two tests:

i) The Government of Newfoundland and Labrador must achieve a level of fiscal capacity per capita well above the Canadian norm (fiscal capacity measures the level of tax revenues per capita a provincial government could receive based on representative Canadian tax rates). This would allow it to provide a level of pubic services consistent with other provinces which now enjoy a higher level of economic well being; and to reduce its current debt and tax burdens. The first test of the proposed trigger would be met when Newfoundland's fiscal capacity per capita reached 110 percent of the Canadian average.

ii) The people of Newfoundland and Labrador must also have reached an improved level of economic prosperity as reflected by the unemployment rate in the province. The proposed 110 percent base trigger is increased by 2 points for every percentage point by which Newfoundland's unemployment rate is greater than the Canadian average.

Leonard Hopkins (Parliamentary Secretary to Hon. Jean Chretein, Minister of Energy, Mines and Resources), June 28, 1984: Speaking on Second Reading of Bill C-43, implementing the Canada-Nova Scotia Offshore Oil and Gas Agreement

The legislation ensures that Nova Scotia will receive the lion's share of offshore petroleum revenues. In fact, in the early years of the agreement, the province will receive substantially more revenues than if it owned the resource on land. There will be wider sharing of revenues only if the province's relative fiscal capacity.... exceeds that of almost all other provinces.

Until Nova Scotia's per capita fiscal capacity reaches 110 per cent of the national average - adjusted upward by two percentages points for every one percentage point that the province's unemployment rate exceeds the national average - the province will receive all offshore revenue, including a major federal tax, the petroleum and gas revenue tax, but excluding the federal share of the corporate income tax.

Pat Carney, 28 June 1984, in response to Mr. Hopkins (Ms. Carney is now a Senator and was Federal Minister of Mines and Energy when the Atlantic Accord was signed with Newfoundland and Labrador in 1985)

The economic discrepancy between Atlantic Canada and other regions of the country is an important fact to keep in mind. It has placed provinces like Nova Scotia, which was one of the most economically active provinces at the time of Confederation - rich with shipbuilding, forestry and fishing - in the category of the "have not" provinces. The offshore oil and gas resources represent a unique opportunity to release Nova Scotia from that category and transform it into a "have" province.

"The Atlantic Accord - Federal-Newfoundland agreement on offshore oil and gas resource management, 1985"

Following the June 14, 1984 Agreement-in-Principle between the Leader of the Opposition Brian Mulroney and Newfoundland Premier Brian Peckford, and the subsequent election of Mr. Mulroney's Progressive Conservative government on September 4, 1984, negotiations took place between the Ministers of Energy for Canada and Newfoundland to finalize an agreement for joint management and revenue sharing of the petroleum resources offshore Newfoundland and Labrador. These negotiations culminated on February 11, 1985 with the signing of the Atlantic Accord.

The Atlantic Accord signed by both the federal and provincial governments implementing that Accord contains a set of "purposes" that outlines the intent of their agreement. The Offshore Accord between the Government of Canada and the Province of Nova Scotia signed in 1986 contains a similar set of purposes.

Three of the eight "purposes" are listed below. Purpose "c" states the principal beneficiary commitment and is identical to the wording in the Nova Scotia Offshore Accord.

(a) "to provide for the development of oil and gas resources offshore Newfoundland for the benefit of Canada as a whole and Newfoundland and Labrador in particular;
(b) "to protect, preserve, and advance the attainment of national self-sufficiency and security of supply;
(c) "to recognize the right of Newfoundland and Labrador to be the principal beneficiary of the oil and gas resources off its shores, consistent with the requirement for a strong and united Canada;

Essential for Chretien, Hamm and Grimes to Find a Solution

A solution to the current offshore fiscal fairness debate between the Government of Canada and the provinces of Nova Scotia, and Newfoundland and Labrador is an important moral watershed for the Canadian Federation. It is a true test of Prime Minister Chretien's vision for our country and his sense of fairness in honouring the intent of agreements entered into with his provincial partners.

Both provinces are experiencing difficult annual financial operating results, have extremely high accumulated debt burdens, high debt servicing charges, and very little flexibility to maintain standards of essential public services or to invest in the acceleration of provincial economic growth. All of this is occurring when revenues from offshore oil and gas are beginning to grow, and which in about five years could be relatively large compared to the annual operating budgets of these two provinces. For example, projected annual royalties from expected oil producing projects offshore Newfoundland could total $800 million; while annual royalties from natural gas projects offshore Nova Scotia for the same time period are estimated at $320 million. Without any change, most of the benefits will be going to the Government of Canada, principally through the unfair "clawing back" of equalization payments that would otherwise be paid to Nova Scotia, and Newfoundland and Labrador.

It is ironic that had the Government of Canada entered into similar offshore natural resources agreements with British Columbia, or Ontario committing that they would be "principal beneficiaries" of these revenues, they would be keeping 100% of any revenues because they do not receive equalization, and therefore are not subject to any revenue "claw backs". In other words, the "have" provinces would become "more have" provinces. Meanwhile Nova Scotia, and Newfoundland and Labrador receive resource revenues from the federal government with one hand, and despite agreements that state they will be the principal beneficiaries, most of those revenues are taken back with the other hand, solely because they are recipients of equalization!

This is not what the Atlantic and Offshore Accords were intended to accomplish. It is not in the best interests of the Government of Canada, or any of the provinces and territories, to deny Nova Scotia and Newfoundland and Labrador what will likely be their best economic opportunity in centuries. Becoming the "principal beneficiary" of offshore fiscal benefits was stated in both Accords, and considered so important that the federal government undertook to enshrine this commitment, and other Accord commitments, into the Constitution of Canada, if requested.

Circumstances have combined to thwart the original objectives of the offshore accords. Therefore, a new mechanism needs to be developed by the federal government and the two provinces to implement these good intentions. If they receive the benefits from their offshore non-renewable resources, these two provinces will have a real opportunity to catch up to national economic standards over the next 20-30 years. To deny these benefits will relegate them to dependency on federal/provincial transfers, likely forever.

That's what they were promised. Only great vision and leadership, and the carrying out of commitments, will ensure they receive it.

Please note: An edited version of this article was published in the Globe and Mail on September 12, 2001 under the title "Boom or Bust?".