OFFSHORE PRESSURE: What Newfoundland wants - and why Danny Williams may get it yet.

The last time Williams met with federal officials, on Dec. 22 in Winnipeg, he ended up storming home and ordering the Canadian flag taken down from provincial government buildings.

Danny Williams, politician
Danny Williams, Premier of Newfoundland and Labrador 2003-2010 (courtesy Maclean's).

OFFSHORE PRESSURE: What Newfoundland wants - and why Danny Williams may get it yet.

 DANNY WILLIAMS was fresh and tanned from a Barbados vacation last week. He leaned back in a plush chair in his office on the eighth floor of Newfoundland's Confederation Building in St. John's. But if he looked relaxed as he began talking, his calm didn't last long. Soon the premier of NEWFOUNDLAND AND LABRADOR was speaking in urgent tones about the file that has overshadowed all others for him: a high-stakes negotiation with Paul MARTIN over equalization payments that could be worth billions of dollars to one of the nation's poorest provinces.

The last time Williams met with federal officials, on Dec. 22 in Winnipeg, he ended up storming home and ordering the Canadian flag taken down from provincial government buildings. It's a measure of the extraordinary animosity this arcane fiscal debate has sparked that, while Williams has ordered the Maple Leaf back up, some Newfoundlanders are still flying the pink, white and green "republican flag," a thinly disguised expression of separatist sentiment. Commentators in the rest of the country were quick to egg Newfoundland nationalists along. In the Globe and Mail, senior columnist Margaret Wente said the province was probably the world's most scenic welfare ghetto.

So now, with just about everybody in this province angry at just about everybody outside it, Williams and Martin will meet again in Ottawa on Jan. 28 to try to reach a deal.

Williams does not believe he should even have to be negotiating at this late date. "The big question we have to ask ourselves here is, why are we waiting so long to get our promise fulfilled? If this were Quebec or Ontario or any other province, this wouldn't be happening. We're now into our eighth month battling away at this. And it's been a battle. And it shouldn't be."

If we're to understand how people here became so incensed, perhaps it will help to go back to June 5 of last year, a hectic Saturday at the end of perhaps the worst week in Paul Martin's political life.

It was the second week of the election campaign, and the trend lines could not be worse. When Martin arrived in St. John's on Friday afternoon, June 4, the daily SES-CPAC tracking poll showed the Liberal lead over Stephen HARPER's Conservatives had shrunk from 13 points to three. The Liberal lead was sinking by about a point a day. The number of respondents saying it was "time for a change" was trending upward, too, and while Martin was still the leader picked by a majority as the best prime minister, Harper had cut that lead in half.

Newfoundland and Labrador have only seven federal seats, but they no longer looked like a luxury Martin could afford to lose. If anything, though, the Liberal crisis in Newfoundland and Labrador was even more depressing than Martin's national headaches. One of Stephen Harper's first campaign stops had been in St. John's, where he promised a business crowd over lunch that he would end the so-called "clawback" of resource revenues from equalization.

Equalization acts like a wage top-up: provinces that are less able to afford basic services are given cash payments by Ottawa to bring them up to a set standard. Currently, every province except Ontario and Alberta receives equalization payments.

A growing amount of Newfoundland's revenue comes from immense offshore OIL developments at Hibernia and Terra Nova. A third, White Rose, is scheduled to come online in 2006. Newfoundlanders hope more will follow. All this offshore activity would allow Newfoundlanders to believe the benighted province is finally catching a break, but for the way equalization works. As a province's own revenues grow, its equalization payments shrink. That's in the very nature of a wage top-up: the more you earn, the less help you need. But for Newfoundlanders it has felt like running up a down escalator. Each dollar in oil revenue is "clawed back" by a $1 reduction in equalization.

In 1984, the Supreme Court ruled that the offshore fell under Ottawa's jurisdiction. But in 1985, Brian MULRONEY's federal government and Brian PECKFORD's Conservative Newfoundland government signed the Atlantic Accord, which gave Newfoundland 100 per cent of the offshore revenues and also what are called offset benefits - effectively allowing the province to keep some of the equalization payments it would otherwise have lost as its oil and gas income grew.

That wasn't good enough for Williams. He wanted full equalization payments, so the one-time bonanza of oil wells would benefit the province directly. Stephen Harper and Jack Layton, in quick succession, came to St. John's to promise they'd deliver.

Which brings us back to Paul Martin's bad week. On June 2, John Efford, the Newfoundlander who serves as Martin's natural resources minister, told a lunchtime business crowd in St. John's that offshore benefits were too important to be discussed during an election campaign. Williams could not have been angrier at Efford's flippant remark. The premier gave his own speech to the same association the next day, saying nobody in Newfoundland and Labrador should vote Liberal if the party failed to deliver an ironclad commitment to 100 per cent of offset benefits.

The next day was Andy Wells's turn. The mayor of St. John's had signed Martin's nomination papers when Martin was running for the Liberal leadership. But now he said he would be voting Conservative because Martin was letting Newfoundlanders down.

Still, Martin resisted making any specific commitment. In Halifax, his last campaign stop before St. John's, the Prime Minister said only that he "understood the arguments that were being made" by Williams and his Nova Scotia counterpart, John HAMM, who was also seeking a 100 per cent offset for resource revenues. Martin was "certainly prepared to deal with" the provinces' demands "on a reasonable basis." That was all.

That night, Martin and Layton taped a CBC town hall meeting in St. John's. Local Liberal organizers told the city's reporters not to expect another media availability from the PM. But the evening closed with news of another stunning poll: Ipsos-Reid, polling for CTV and the Globe and Mail, put the Liberals only one point ahead of the Conservatives. "The Liberals are falling through the floor," CTV's Ottawa bureau chief Craig Oliver reported.

The next morning, June 5, Williams's phone rang at about 7:20 a.m. Martin told Williams he would accept the Newfoundland government's demand for 100 per cent offset of offshore revenues. Martin announced the news at a morning campaign event. "What we've really got to do as a government is make sure that Newfoundland and Labrador is the primary beneficiary of its resources," he said. He'd spoken to Williams, he said, "and I have made it very clear that the proposal that he's put forth is a proposal that we accept."

Almost immediately, Williams began seeking assurances that Martin had promised what he appeared to have promised. In a letter to the PM on June 10, he wrote: "An important task for both of us now is to ensure that Newfoundlanders and Labradorians have a clear and precise understanding of your commitments and what has been agreed to."

That letter received no written response from the campaigning Martin. After the election, on July 10, Martin and Williams spoke again by telephone. Again Williams wanted written confirmation. On Aug. 5, he wrote: "It is imperative that our implementation teams begin their work with a clear understanding of our agreement," he wrote. He sent Martin a draft of an "instruction letter" the two could send to their representatives. He invited Martin to suggest any changes.

Again, no answer. "I am very concerned that we have not begun to implement our agreement," Williams wrote on Aug. 24. He urged Martin to sign off on the instruction letters within 10 days.

Martin replied to none of Williams's letters. Federal officials now say the Prime Minister was focused on the September First Ministers meeting on health care, to the exclusion of other federal-provincial issues. Williams would simply have to wait.

When the September summit ended with a health-care deal, several provinces persuaded Martin to reconvene the premiers to overhaul equalization. That's the summit that Williams stormed out of before it began, taking a couple of hours first to explain to a succession of reporters and TV crews his rage at Martin's foot-dragging.

It is worth taking all this space to belabour the process that led us to Williams's October tantrum and its sequel, his December tantrum, because it gives you a chance to see how catastrophically the two leaders' styles have clashed.

People in St. John's are not used to giving Danny Williams any backtalk. The multi-millionaire cable television entrepreneur favours a no-nonsense style. He has a famous temper. And he comes from St. John's Tory stock - he is the first "townie," or native of the capital, to become premier since the province joined Confederation in 1949. That means he grew up steeped in the city-centred and Irish Catholic nationalism that made St. John's vote against Confederation in 1949 and still makes it the headquarters of provincial resentment against the mainland. So Williams was more or less born with a chip on his shoulder.

People in Ottawa are not used to getting quick answers from Paul Martin. The Prime Minister may see nothing wrong in resisting a commitment until June 4, making it under duress on June 5, then providing no detail until Oct. 24, when finance minister Ralph Goodale faxed a proposal to Williams. But that pattern of behaviour has put a good many Newfoundlanders off. And if there is any province where people are prone to believe they have been given the runaround, it is this one.

It is hard for mainlanders to understand how a province that will receive $674 million in equalization payments in 2004-05 - $1,304 per capita, compared, for example, to the $488 Quebecers get - can feel hard done by. But every Newfoundlander comes with a stock of hard-luck memories. There's Joey SMALLWOOD's hasty 1969 deal with Quebec for hydroelectric development at CHURCHILL FALLS, a deal that pretty much locked payments in at 1969 rates, depriving Newfoundland and Labrador of close to $1 billion a year these days. There's the utter collapse of the cod fishery in 1992, due, in the minds of many, to foreign overfishing that Ottawa could not bother to stop. There's the out-migration that has cost the province one-tenth of its population - the youngest, most productive tenth - in a decade.

Periodic attempts to tot these losses up against gains are a Newfoundland obsession. The real balance can never be known. But the pain of lost opportunity is real.

So is the pressure of today's predicament. Robert Sweeny is a historian at Memorial University. He described a set of fundamental changes to the province's economy that give it a veneer of prosperity but leave it fundamentally precarious. The cod fishery has been replaced by a shrimp and crab fishery that lands a more lucrative catch than cod - about $1 billion a year, Sweeny said - but employs far fewer people. Perhaps 2,000 work in the new boats, not the 18,000 who used to work in cod boats. Another 4,000 work in processing plants, not the 16,000 or 20,000 who used to.

Meanwhile, the Voisey's Bay mining development led to a land-speculation boom that profited many St. John's residents. A fair number played in the booming stock market of the 1990s. "Land Rovers started showing up," Sweeny said. "BMWs, which we'd never seen around here." On Water Street, where Sweeny found 32 boarded-up stores when he moved here in 1989, there are high-fashion boutiques and glamorous, pricey restaurants.

So the perennial capital of Newfoundland alienation is also the capital of a confident, affluent micro-culture. "But what's important to understand is that it's not the tip of the iceberg," Sweeny said. "Because what's underneath? In 2001, outside of St. John's, six out of 10 adults were without gainful employment."

Danny Williams sits atop this rickety income tower, trying to steer the province out of a mammoth hole. "Our forecast from PricewaterhouseCoopers back in January was projecting a consolidated annual deficit of $1 billion, on gross revenues of $4 billion." It is not at all clear what good his fury has done. Nova Scotia's John Hamm has thrown no tantrums, lowered no flags, and seems closer to a deal, albeit more modest in its dollar figures, than Williams. But for what it's worth, the feds are in a singularly diplomatic mood these days.

I interviewed a senior federal official about the Dec. 22 proposal, which led to Williams ordering the flag lowered. The federal paper looks quite close to Williams's demand: 100 per cent protection of resource revenues, 100 per cent offset on equalization, protection against payments suddenly vanishing even if Newfoundland's revenues lift it above its status as an equalization-receiving province.

But there were still a few paragraphs in the document that could make it far less beneficial to Newfoundland than it appears. I won't trouble you with the troublesome passages here, because when I pressed the federal official, they simply faded away. The Dec. 22 document was "a discussion paper," and no more. Every line was up for negotiation. "It is, under no circumstances, a federal offer or a draft agreement in principle."

There can be no better indication of how furiously the feds are backpedalling, because the top of the document in question reads "DRAFT... Agreement in Principle." Danny Williams's bravado has not got him nearly as far or as fast as he wanted. But pushing hasn't been entirely without effect. And he's not done pushing yet.

THROUGH THE AGES: Newfoundlanders have had their share of hard-luck history and lost opportunities

1000 CE: Norse Vikings establish oldest known European settlement in North America at L'Anse aux Meadows.

1497: John Cabot arrives. As a reward, King Henry VII pays Cabot £10.

1855: Newfoundland achieves responsible government under Philip Francis Little.

1916: Newfoundland regiment decimated on July 1, the first day of Battle of the Somme, losing 732 dead, wounded or missing out of the 801 soldiers involved in the assault.

1949: Joins Canada and becomes the 10th province.

1966-74: Construction of the Churchill Falls generating station in Labrador. Lopsided agreement with Quebec, through which power has to pass, gives Hydro-Québec cut-rate energy prices until 2034; the utility makes a killing as energy prices rise.

1979: Hibernia oil field discovered on Continental Shelf. Supreme Court subsequently determines that Ottawa has jurisdiction, and the sole right to exploit natural resources.

1985: Ottawa and Newfoundland sign Atlantic Accord, which gives the province 100 per cent of offshore oil and gas revenues and details how that will affect the amount of federal equalization payments.

1992: Federal government declares moratorium on the cod fishery after a decline in stocks. In 2003, Fisheries Resource Conservation Council scientists find moratorium did not lead to a recovery and Ottawa declares a moratorium on the last remaining cod fisheries.

1993: Nickel discovered at Voisey's Bay, and Inco Ltd. wins bid for right to mine. Disagreement over where the raw material will be processed stalls deal until June 2002, when the company finally agrees to build an $800-million processing plant in Argentia, Nfld., by 2011.

2004-PRESENT: Newfoundland and Ottawa try to renegotiate Atlantic Accord. The province wants full equalization payments, with no ties to oil and gas revenues, to which Paul Martin has verbally agreed. Ottawa also wants the agreement to last until 2012, with possible renewal at that time. Newfoundland wants it to last until oil and gas reserves have been depleted.

Maclean's January 31, 2005