In a post on iPolitics, author and journalist Madelaine Drohan discusses the move by the PQ government in Quebec to embrace the Generations Fund - a sovereign wealth fund created by the Liberal government of Jean Charest in 2006. The original plan was to invest water power and mining royalties into a fund whose income would be used to pay down the provincial debt. The fund was apparently valued at 4.3 billion dollars at the end of March 2012 and the recent PQ budget has directed that starting in 2015-16, all mining royalty revenues – about 325 million dollars a year – would go into the fund. Given the prospect of future mining development in Quebec’s North under the auspices of the Plan Nord, this fund could grow substantially in the future.
Of course, as Drohan points out, this is not a new idea. Internationally, Norway, Alaska and Kuwait have these funds. Alberta also has its Heritage Trust Savings Fund, which initially was supposed to receive 30 percent of oil and gas revenues. Yet Alberta has not been that persistent in saving for the future, preferring to spend most of its resource bounty on current consumption. Since 1990, Norway has used its oil natural resource revenues to build a fund that now approaches $660 billion dollars US. However, Norway saves 96% of its resource revenues as opposed to estimates of up to 30% for Alberta and also levies much higher tax rates to provide current services. Indeed, Herb Emery and Ron Kneebone in a May 2011 Policy Options piece maintained that the provincial government in Alberta saved less than 10 percent of the $130 billion of natural resource revenue collected between 1970 and 2004.
Investing a portion of resource rents rather than using them entirely for current consumption is the responsible long-term thing to do especially when those resources are non-renewable. Alberta could certainly do better given that the Heritage Trust Fund presently contains only about 16 billion dollars. Drohan points out that other Canadian provinces could do better also as with the exception of Prince Edward Island, they all have significant royalties from mining, oil and gas.
I concur. Two specific points are worth making here. First, Ontario is poised to embark on a massive expansion of its mining development in Northern Ontario. While successful development is probably still years away, in all the discussion and debate, there is little mention of planning for the future by retaining a large chunk of the future resource royalty revenues and investing them in a sovereign wealth fund. You would think Ontario might have learned from its past. In the late 19th and early 20th century, forests in Northern Ontario were the equivalent of oil today as bonuses, dues and ground rents generated as much as 25 percent of Ontario government revenues. Yet, these revenues went into current consumption. Placing a portion of these revenues into a long-term endowment would have been a positive form of economic stewardship. Making the same mistake again is downright irresponsible to future generations.
Second point. Ottawa is currently embroiled in decision-making on whether or not to allow foreign purchases of Canadian petroleum companies Nexen Inc. and Progress Energy Resources Corporation. The complication of course is that these are not private companies but state owned companies – in particular – China’s state oil company CNOOC and Petronas from Malaysia. These are not private companies so I suspect that the usual rules do not need to necessarily apply. At the risk of being told by China’s Ambassador to Canada to "shut up”, how about the following suggestion: If Ottawa decides to allow these state-owned companies to purchase private Canadian oil companies, why not increase the net benefit to Canada by placing a special and substantial federal resource revenue charge on their Canadian production that goes into a Canadian federal sovereign wealth fund? It will be difficult for these companies to complain that they are being placed in a non-level playing field compared to other private investors given that they are state-owned companies. Private energy companies in Alberta need not fear the return of a national energy policy as these charges would apply to foreign "state-owned" companies investing in Canadian energy resources. Can you argue that the charge is a form of tariff or protectionism? Maybe. But, we would simply be treating all state-owned companies that choose to buy Canadian energy and resource assets the same while treating them differently from private companies. We would be arguing that a state owned company represents a different form of investment in our national economic space than one representing private shareholders. Intriguing proposal or merely a half-baked idea?