Uncertainty in an uncertain time

Leah Harris is ready for 2021.

In 2020, a year of “doomscrolling” and dumpster fire memes, she went about building her small business, Sweet Cheeks Bakery.

Pre-COVID, she’d had a second child. She’d also experienced debilitating migraines and dramatic vision loss, with an inability to properly focus her eyes, leaving her suddenly without a driver’s licence and working to adjust. In late 2019, she had a related eye surgery that returned most of her sight but not her licence.

January 2020’s Snowmaggeddon storm—and its call-in-the-armed-forces state of emergency—launched the new year. Then COVID-19 arrived and schools closed in March. Like other parents, she needed to get a handle on homeschooling for her daughter. She also worked out when and how her non-verbal son could receive assessments and then start early-intervention therapy at home.

She might start sooner in the day on those stretches when her fiancé Jim was home on turnaround, but otherwise, she’d often work on her business after tucking her children into bed.

From the beginning, she was mindful of financial limits, with greater concern extending from the uncertainties of the pandemic. “I didn’t want to immediately place us into more debt,” she says in a recent interview, explaining her caution through 2020 and small steps forward.

“With the economy right now, and my fiancé is a tradesman, he can get laid off at any moment,” she says.

Hard Realities
It is not just unfair but a disservice to suggest it’s all a matter of desire or will for a business owner to survive, let alone thrive—especially now. There’s no one story that can illustrate all the challenges in Newfoundland and Labrador, or the proper response. Because the province is not facing down COVID-19 on equal footing.

In 2020, capital spending was down, expected to land 13.6 per cent lower than the year before. Large employers made difficult but necessary decisions.

Markers of the upheaval are everywhere. The province’s only oil refinery was left idling and in limbo, it’s future undecided; a concrete gravity structure (CGS) for the offshore with a base the length of a soccer field was left only partly complete on the edge of Placentia Bay. Lower than expected salmon prices and “market uncertainty” left Grieg NL ratcheting back on the pace of its spending, postponing some construction work with related layoffs. Tourism sector businesses were put through the crucible, as the word “pivot” became a touchstone. Plenty of businesses dependent on the basic flow of capital from larger operations simply did not survive despite COVID-19-related supports.

Discussion of new supports for hard-hit businesses and workers, or methods of spurring new businesses like Harris’, all circle back at some point to the subject of public spending. In that, Newfoundland and Labrador has a big problem. By its own budget for 2020-21, the province’s borrowing needs climbed to $3 billion for the year, with a net debt forecasted to reach $16.4 billion. The net debt-to-GDP ratio is forecast to rise to 55.7 per cent, being the highest in the country.

TD economist Omar Abdelrahman pointed out in the fall: after the double whammy of COVID-19 restrictions and an oil price shock, the province is receiving a “disproportionate economic hit” into 2021, atop pre-existing issues and a path forward he described as “long and arduous.”

Oil bubble bust
Say it over and over: Newfoundland and Labrador is spending more on debt servicing than education.

The province’s annual budget is presented on a cash basis: money in, money out. In 2020, the top destination for money going out was healthcare, estimated at 37.7 per cent of total gross spending. In second place—ahead of K-12 education (10.5 per cent), post-secondary (5.1 per cent), transportation and infrastructure (5.9 per cent) and more—was spending on debt charges and financial expenses (landing at 18.6 per cent).

Any grand plans produced now by the government not addressing the credit bill and at least roughly mapping a return to manageable budgeting are not likely to be met kindly by credit rating agencies. That risks downgrades, a higher cost for borrowing and higher debt servicing costs, compounding the financial problem.

Budget 2011 marked a milestone of cumulative budget surpluses from the “oil bubble” of about $5.5 billion over seven years. That was followed by seven years of deficits, of more than $6 billion.

Historically speaking, Newfoundland and Labrador had decades of comparatively small deficits, or breakeven budgets, a brief period of oil-fueled surplus, and more recently… pow.

In her first budget as Finance minister, Siobhan Coady announced a forecast $1.84-billion deficit for the financial year ending in 2021. No, it didn’t include $320 million offered by the federal government as a support for the oil and gas sector, or federal “safe restart” funding, but these don’t fundamentally change the province’s troubled bottom line.

Reached by phone on a frosty November morning, Coady says her department had already begun, with bureaucrats throughout government, looking into core department needs and what a 2021 budget—and the emergence from COVID-19—might look like.

There was only uncertainty.

“We don’t know at this point about the impacts of COVID, the further impacts of COVID,” the minister says as a first and foremost, concerned for health, safety and what a new period of lockdown could do to the economy.

For 2021, there is the timing and rollout of the vaccine to consider, and very significantly how the province might fare as federal COVID-specific financial supports are rolled back.

“It is something as Finance ministers we talk about on a regular basis—the transition from what I’m going to call a COVID situation to a post-COVID, and how do we transition and keep some stability,” Coady says, in a rare nod to a challenge without a ready answer.

She stands positive, hopeful, in her view for the province. She highlights relatively healthy retail spending (forecast at a better-than-expected six per cent drop in 2020), though without mentioning the federally funded COVID-19 response programs contributing there.

She mentions federal-provincial COVID-related support programs and programs like the home renovation rebate.

Coady doesn’t veer into the fact Newfoundland and Labrador has the highest level of unemployment of all the provinces, forecast to run 13.9 per cent in 2020 (average 13.5 per cent through November).
Instead, she talks about the foundation for the future. “We’ve got a foundation in mining and technology and other sectors that are strong. We’re seeing some of the activities—the oil and gas prospectivity is still strong, the demand is still strong, we just have to make sure the investments are coming, that we’re attracting the investments globally,” she says.

Figuring out what comes next
There’s nothing being kept off the table when talking about the coming year.

Right now, Newfoundland and Labrador has an oil and gas task force still settling on how to best spend $320 million in federal funds, a health review committee beginning work on the province’s next 10-year health accord, a joint working group on municipal regionalization preparing recommendations, and talks with the feds on Muskrat Falls Hydroelectric Project debt dragging on.

Above all for Coady, and absolutely not a shampoo reference, the PERT is essential.

PERT is the internal tag for the “Premier’s Economic Recovery Team,” known more commonly to most people now as the economic recovery task force, or that thing Dame Moya Greene is leading. Greene formerly ran Canada Post and was the first non-Briton and first woman to be named chief executive officer of the Royal Mail, leading the service through privatization.

She and her team (Chief Misel Joe, Brendan Brothers, Moya Cahill, Zita Cobb, Oral Dawe, Philip Earle, Richard Kostoff, Iris Petten, Gary Mooney, Mary Shortall, Dave Vardy and Earl Ludlow) have been asked to review the province’s fiscal position: debt, revenue, spending, programs and services. Oh yes, and anything they might consider relevant.

The expectation is they will produce at least some potentially controversial, “tough love” takes on government finances when they report in ahead of a spring budget.

Progressive Conservative leader Ches Crosbie has been critical since its formation, saying the government already knows what it needs to do. He says the province needs to—sooner rather than later—settle longstanding back and forth over Muskrat Falls debt and take a more aggressive stance if needed for “a fair deal with Ottawa,” highlighting the fact the province isn’t receiving equalization payments.

“We (also) have a jobs crisis with the offshore. What we need to do is we need a path to economic and jobs recovery,” Crosbie says.

On climate change, he says a longer-term plan to get the province to net zero status needs to be developed, including offshore natural gas and a close look into the potential in hydrogen.

NDP leader Alison Coffin says there’s no political disagreement on the need for action, just on what the priorities are and how to approach them, with the NDP concerned about the government review teams and lack of clarity in how it all comes together in meeting public service needs, then spurring private investments.

“What I have a sense might be happening is a very piecemeal approach to everything and when you have a piecemeal approach to everything, you create a bit of a Frankenstein economy along the way, now don’t you?,” she says.

She says, among other things, the NDP would be pushing with the federal government for even more money for broadband infrastructure, as a means of near-term employment and longer-term opportunity.

No one was talking mass cuts to the public service.

Economist Doug May told Atlantic Business Magazine he had not presented to the PERT, being not keen on getting too political or feeding soundbites, but has offered references for base understanding, including his latest paper with Patti Powers, Wade Locke and Alton Hollett, titled: “Newfoundland and Labrador in Transition.”

It reflects on a longstanding tendency to describe the provincial government’s financial shortcomings only in more immediate concerns like the pandemic, without addressing fundamental, structural problems.

Looking ahead, it suggests people can assume continued demographic challenges, population decline, a linked drop in income tax revenues, no windfall for the government from oil as a “fiscal saviour” and a likely decline in the number of public sector jobs (they’ve suggested bringing the number down to be consistent with levels in Nova Scotia and New Brunswick).

In the private sector, unemployed workers are expected to look into jobs outside the province.

“It is likely that the adjustment process will lead to permanent outmigration rather than mobile work,” the economists stated.

When it comes to COVID-19 and businesses, “survival will mean cutting costs,” they wrote. “Smaller and medium-sized local enterprises will have a much harder time surviving.”

May told Atlantic Business Magazine it’s not a case of being “doom and gloom” or a “naysayer,” but realistic.

“I think in terms of the actual economy, it’s going to be a rough patch,” he says.

The province has to deal with Muskrat Falls project costs, but its options are constrained. Who will carry the added costs of the project—at $13.1 billion, still unfinished—remains unaddressed by government. The Public Utilities Board has agreed there is a limit on how high electricity rates can go to pay for the project, without people looking to alternative options for heat and beginning a utility spiral whereby fewer users steadily drives up costs leading to even fewer users. Yet in keeping electricity rates artificially lower, the province takes on debt it will need to address.

The Newfoundland and Labrador Association of Public and Private Employees (NAPE) has put in the effort to explore what addressing the debt could look like, commissioning a report in 2019 from David Thompson at PolicyLink, submitted to the Muskrat Falls Inquiry. It suggested a cut of $500 million in spending across the public service would equate to a roughly $11,000 pay cut per public sector worker (NAPE and others), or about 7,700 public sector layoffs.

“It also would result in thousands of jobs being lost in the private sector. Economic multipliers suggest 7,700 public sector job cuts would result in 3,100 jobs being lost in the private sector,” it stated.

That matters because the province also has a labour problem. The province has a low participation rate, and rapidly aging population. Job losses—regardless of the reasons—in tourism and hospitality, in oil and gas, in the skilled trades, delays in expected job growth in aquaculture and more are all very real. And just as at the time of the cod moratorium career fishermen were not able to side-step into a tech job feeding the dot-com boom, there’s no way to snap your fingers and see all of the province’s unemployed residents shuffled into new roles in 2021.

For his part, Doug May didn’t advocate for any particular approach to addressing all of that, but did again push attention on the provincial government’s debts, advocating all public spending be weighed with the honest, clear question: is this absolutely necessary?

He says a deep dive into spending should be done even if—and it would have to be while dismissing the protests from other provinces—Newfoundland and Labrador is offered some sort of outside recovery funding.

“Does it really solve the problem? It’s like ‘take two Aspirins and go to bed.’ Does that solve a fundamental problem of an ulcer or whatever? A cancerous growth? No. It takes the pain away for the moment but it doesn’t deal with the underlying structure,” he says.

Energy and new opportunity
While the public sector faces change, change is already the order of the day for the private sector, thanks to what May refers to as “paradigm shifts,” covering everything from remote work options to the push toward a net zero economy.

The province’s oil and gas sector has already been adapting to the latter. The annual fall seminar for the Newfoundland and Labrador Oil and Gas Industries Association (Noia) featured representatives from both large oil and gas companies and the association’s staple supply and service companies—talking a great deal about everything but oil.

Presentations featured companies working in oil and gas, but also active in defence contracting, renewable energy service, environmental study, subsea imaging and other ocean technologies, with names including PanGeo Subsea, Genoa Design and Kraken.

Businesses that had not previously looked at markets outside oil are certainly looking now. And the diversification is why, after 40 years focused on helping member companies become part of the oil and gas supply chain, in 2021 Noia is going back to its membership.

“The energy sector is evolving and Noia has been evolving with it. To that point, in the fall of 2020, the Noia Board of Directors approved a consultation process with the membership about the possibility of broadening the scope of the association’s engagement in various energy sectors,” says CEO Charlene Johnson, in a statement.

The association is taking the next several months for a little self-reflection, to determine its future direction and how to best be of value to members long-term.

It isn’t a write-off of oil and gas. There is still production, substantial contracting. The province still leans heavily on oil revenues, while oil companies are still evaluating largely unexplored areas offshore and discoveries like Equinor’s Bay du Nord find may yet be developed.

Yet new and, in many cases, more immediate opportunities can’t be ignored entering 2021.

The tech sector
‘Tech is the new oil’ pronouncements are sure to fly, as one sector struggles with reduced capital and another celebrates an attention-grabbing deal and positive momentum in drawing extra-provincial investors.

The announcement of the acquisition of financial crime fighter Verafin by Nasdaq for US$2.75 billion is a historical marker in discussions on provincial diversification. But with that in mind, it’s worth mentioning not every company is a Verafin and Verafin needed 17 years to reach its current heights.

TechNL board chair Craig Rowe is also president and co-founder (2006) of ClearRisk, a risk management software company. He says the single biggest challenge to continued tech growth into 2021 is talent. “By far. By far,” he says.

The province needs, “a talent pipeline like no one else,” he says. The numbers back him: while more graduates into the sector from provincial post-secondary institutions will help, they are not going to be enough to meet modest projections.

According to the registrar’s office at Memorial University of Newfoundland (MUN), in the last five years, there were 1,670 students enrolled in a computer science or engineering major taking courses in computer science (and various sub-streams for software, video games, smart systems) and computer engineering. There were 279 graduates from the computer science and computer engineering programs in the same period of time.

The 88 graduates in 2019 was more than the 45 in 2015, but even with graduates from college programs and other technology studies, fall short of what could be needed.

It’s why techNL was so supportive of the announcement of a new “Priority Skills” immigration pathway under the provincial nominee program. New jobs in sales, marketing and other roles don’t get created without other essential roles being covered.

“So you take companies like Verafin and Genoa Design, Mysa, Colab, ClearRisk—the talent shortage is not going to stop us from growing. We are going to grow. But if we don’t fix the talent problem here then that growth, those jobs are going to be created elsewhere and that benefit is not going to accrue to Newfoundland and Labrador where we desperately need it,” Rowe says.

And you can’t ignore the need to feed increased tech-related demands outside of self-described tech companies.

National Bank of Canada economists Jocelyn Paquet and Marc Pinsonneault perhaps described it best in saying the longview on the Government of Newfoundland and Labrador right now remains “nebulous.”

It’s why public debate will happen over how much public money can be offered in new venture capital for tech, and to what degree the government and not the industry will de-risk investments and fund new, related infrastructure, whether provincial politicians meaningfully participate or not.

Venture capital is no small piece. Rowe notes public seed funding through the jointly public and industry-funded VentureNL helped notables in the local tech ecosystem—including social media company HeyOrca! (remember who supported the #DollyPartonChallenge), education and gaming studio Clockwork Fox and biotechnology firm SequenceBio—all get started and build.

Traditional industries
Other areas of the economy deserve attention in the province’s economic remodeling.

The province’s seafood sector for example is valued at $1.4 billion. It directly employs more than 15,000 people in over 400 communities. Four hundred.

FFAW-Unifor president Keith Sullivan noted heading into 2020 the province enjoyed half a dozen of its top seasons by total landed value, with the marker reaching $816 million in 2019.

COVID-19 is a shock to the sector, but Sullivan says there were interesting gains in areas like frozen crab sales in U.S. grocery stores. “It’s hard to be anything but doom and gloom in some sectors, but when it comes to the fishery I think there’s a cautious optimism,” he says.

He forecasted the final tally on 2020 will still end up another of the best years for total landed value. And despite an uneven distribution of benefits and COVID-19 setbacks, he considers the sector generally healthy.

There will be continued close watch in 2021 on the status of COVID-19 in top seafood export destinations: the United States, China, Denmark, Japan and the United Kingdom.

When it comes to needs, technology is top of mind; climate change is affecting the health and distribution of fish and shellfish populations; some of the targeted 2,500 new immigrants a year to the province by 2022 are needed to help meet the needs of the processing sector; push and pull continues over access to resources for inshore and offshore enterprises.

“And too often it’s kind of taken for granted and there’s not enough focus on the policies of keeping the value of the fish here,” Sullivan notes, flagging union concern over the Royal Greenland takeover of Quinlan Brothers and generally corporate interests in the inshore.

The complicated but meaningful history, rural versus urban perspective, the needs for sustainability are all why Sullivan would have liked more direct involvement on the premier’s economic recovery team.

When it comes to mining, another major sector, the province has high-grade iron ore, nickel, copper, cobalt and gold, with mineral shipments valued at $3.7 billion in 2019 (latest available). It’s the highest returns since 2011.

The province has the minerals to feed a post-COVID economy.

A report from McKinsey & Company in 2019 suggested, “if Newfoundland and Labrador’s mining industry can keep pace with the expected growth in demand for these key minerals, mineral shipments could increase by nearly $1 billion and generate up to 3,000 new jobs by 2030.”

Very much like the oil and gas sector, it only happens if exploration doesn’t drop off and new finds are identified. Then the price needs to be there to spur production.

The province had a spike in exploration spending in 2012, driven by interest in Labrador, but quickly dropping off, with a 2016 dip to just $22 million. There has been some more recent growth, with on-island 2020 exploration forecast over $50 million. But that’s still not close to the $194 million in 2012 (the highest value ever recorded for the province in a given year, driven by prices and not government spending).

With the announcement late in 2020 of layoffs at the Beaver Brook Antimony Mine, attention will be paid to existing producers—including Canada Fluorspar, Rambler, Anaconda, Vale, Tacora, Tata Steel Minerals Canada and IOC—to see how they fare in the storm. That will be largely dependent on international markets and demand, another reason the forecasted economic recovery, following distribution of a vaccine, can’t come soon enough.

More to the economy
If there was any place to talk about the need for intervention, however it’s funded, it’s the tourism and hospitality sector.

In the decade from 2008 to 2018, the tourism and hospitality industry in Newfoundland and Labrador grew at a rate of about 3.7 per cent a year and was described as a critical and growing sector of the economy. The sector continues to be slammed by COVID and specifically restrictions on travel, movement and gatherings.

Tourism is an area that will not recover until well after the COVID-19 vaccine is widely distributed. Yet the timeline provides a window of prep, to position the province to capitalize on the surge in post-pandemic travel.

The strain and effect of COVID-19 even post-vaccine is one concern for business. The positioning to capitalize on the recovery is another, and one the sector can’t afford while struggling to survive.

Real recovery in tourism and hospitality will require a return to normal on Marine Atlantic, including sailings into Argentia. Above all, it requires restoring air access, then finding a way to add new air access. Upping the growth of non-resident tourism spending to even six per cent a year would offer thousands of new jobs throughout the province.

But the discussion right now across the board is around survival.

Head down, chin up
Leah Harris and her family are typical Newfoundlanders and Labradorians. They have no idea what their power bills will look like in the next few years, no idea what their taxes will look like, if their son’s therapy will remain doable, if Jim will lose his job like so many other tradespeople, or if Sweet Cheeks Bakery will really take off.

She’s inching things forward regardless. Working with Jennifer Wellsman, owner/chef/teacher of Thyme Catering and Cooking School in St. John’s, Harris has grown and been able to secure a full manufacturing licence for retail. She’s supplying the Market Family Café in St. John’s and, also in the city, the café launched by Saltwater Designs, with steady online sales.

Her isolation survival kits did well; chocolate bombs and strawberry crunch cake have been hits. Locals buying local helped to squirrel away some money. A food truck launch in 2021 is her next step.

Harris lived away from the province for more than seven years, but “came home” five years ago. “This is where we want to raise our kids,” she says. And that’s all it comes down to right now.

“We’re really set on making things work here.”