NEWS FEDERAL. Natural resources for all Canadians

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FEDERAL NEWS Natural resources for all Canadians Madelaine Drohan Canada correspondent for The Economist She contributes regularly to its sister company, the Economist Intelligence Unit.

5 No 2 There was much to like in the April 8 th 2014 speech 1 by former prime minister Brian Mulroney in which he laid out a path to prosperity for Canada based on making the most of our natural

1 FEDERAL NEWS Natural resources for all Canadians Madelaine Drohan Canada correspondent for The Economist She contributes regularly to its sister company, the Economist Intelligence Unit. June 2014 Vol. 5 No 2 There was much to like in the April 8 th 2014 speech 1 by former prime minister Brian Mulroney in which he laid out a path to prosperity for Canada based on making the most of our natural resources. Adopting sensible environmental policies, looking beyond the United States for export markets and creating better partnerships with the provinces and First Nations are all sound ideas. But in listing the major players whose agreement is required for his plan to become reality, Mr Mulroney left out the most important: the people of Canada, ultimate owners of natural resources. This newsletter is published by A Quebec Think tank on Federalism Place du Commerce, Suite 189 Montreal, Quebec H3E 1T8 Telephone: info@ideefederale.ca Governments, business and the First Nations view resource development through the prism of their specific needs and wants. Governments want a sound economy, but also the resource revenues to fund their spending plans and the political popularity to win re-election. Business wants profits. First Nations want a say on whether development will take place in their traditional territories and a fair share of the benefits. 1.

2 Canada s dismal record for saving and investing its resource wealth has improved marginally in the last couple of years The average Canadian may share some or even all of these objectives as a citizen, a shareholder, or a firm believer in the rights of First Nations. But individual Canadians require something more than a plan to get resources to market as efficiently and sustainably as possible. As owners, they need to know that the money made from selling an irreplaceable asset which is what non-renewable resources are will be treated as a financial asset to be saved and invested rather than as income to be spent. The lack of such assurance is the big hole in Mr Mulroney s plan. Canada s dismal record for saving and investing its resource wealth has improved marginally in the last couple of years: The Northwest Territories set up a fund, Alberta clarified rules governing its Alberta Heritage Savings Trust, and the governments of British Columbia and Saskatchewan talked openly of setting up funds of their own. Yet compared with many other resource producers around the world, Canada lags, not just in the amount of resource revenues saved, which is negligible, but also in how existing Canadian funds are structured and managed. There are an estimated 54 resource funds set up by national and subnational governments, holding an estimated total of US$3.5 trillion, according to a report released April 8 th by Revenue Watch Institute and the Vale Columbia Center on Sustainable International Investment. The oldest of these dates back to 1876 (the Texas Permanent University Fund). Interest has quickened in recent years. There have been 30 funds established since Canada has two pure resource funds, both at the subnational level -- the Alberta Heritage Savings Trust and the Northwest Territories Heritage Fund and one mixed fund the Generations Fund in Quebec, which includes revenues from hydropower leases but will begin receiving mining royalties next year. 2 In total the three contain just over C$20bn 3, or a paltry 0.5% of the global total, with Alberta accounting for about three-quarters The Alberta fund had C$17.3bn as of December 31 st, the Quebec fund had C$5.6bn as of March 31 st and the NWT fund had about C$1 million according to 2014 estimates pg 5 at

3 There is no national fund, not because it would be impossible to set up but because the political will is lacking. The federal government does not collect much in the way of resource royalties. 4 Natural resources lie within provincial jurisdiction. Yet Ottawa could easily identify how much corporate income tax is directly related to the non-renewable resource sector and set it aside. It has not done so because there has been no sustained pressure on federal politicians, who have found plenty of other ways they would like to spend the money. Setting up a fund and putting money into it is only the first step on the path to responsible stewardship of revenues from non-renewable resources. This does not mean that the public would not support such a fund. Recent events in the Northwest Territories suggest the average citizen is more keenly aware of the need to save than politicians meant to represent their views. Those events started with the February 6 th 2014 budget presented by Michael Miltenberger, the territorial finance minister, in which he said that 5% of the resource revenues the territory would begin receiving after devolution April 1 st would be put into the newly created Northwest Territories Heritage Fund. 5 Following a barrage of criticism, Mr Miltenberger quickly increased the allocation to 25%. 6 The territory has tremendous needs when it comes to building new roads, schools, hospitals, and communications infrastructure. Yet despite those needs, the public wanted at least a quarter of natural resource revenues to be saved. Setting up a fund and putting money into it is only the first step on the path to responsible stewardship of revenues from non-renewable resources. Here again, Canadian jurisdictions are falling short. This is best illustrated by comparing what goes on in Canada with the findings of the recent Revenue Watch Institute report. It looked at the 54 existing funds and came up with six recommendations that amount to best practices for resource fund governance. They are: 1. Set clear fund objective(s) (e.g., saving for future generations; stabilizing the budget; earmarking natural resource revenue for development priorities). 2. Establish fiscal rules for deposit and withdrawal that align with the objective(s). 3. Establish investment rules (e.g., a maximum of 20% can be invested in equities) that align with the objective(s). 4. The federal government has been collecting resource royalties in the NWT and Nunavut. After devolution on April 1 st, the NWT will collect its own royalties

4 f you plan to set up a longterm savings fund, it is worth spelling out what the money will be used for. Otherwise, future governments will find alternative uses. 4. Clarify a division of responsibilities between the ultimate authority over the fund, the fund manager, the day-to-day operational manager, and the different offices within the operational manager, and set and enforce ethical and conflict of interest standards. 5. Require regular and extensive disclosures of key information (e.g., a list of specific investments; names of fund managers) and audits. 6. Establish strong independent oversight bodies to monitor fund behavior and enforce the rules. 7 If you plan to set up a long-term savings fund, it is worth spelling out what the money will be used for. Otherwise, future governments will find alternative uses. Of the three established funds, Quebec s Generations Fund, set up in 2006, has the simplest and clearest mandate: repay the provincial debt. 8 Alberta initially adopted a three-pronged approach in 1976: save for the future, strengthen or diversify the economy, and improve the quality of life of Albertans. It dropped the economic angle in the late 1990s, saying the fund is to provide prudent stewardship of the savings from Alberta s non-renewable resources by providing the greatest financial returns. 9 That was fuzzy enough for a series of governments to do what they wanted with the money. The mandate for the Northwest Territories fund is equally vague. The purpose, as spelled out in legislation, is to ensure that future generations of people in the Northwest Territories benefit from ongoing economic development. 10 Having a clear objective doesn t mean you will reach it, but it s a good first step. The most important rules, according to the Revenue Watch Institute study, are those covering how much money should be put into a fund, how much can be withdrawn and under what circumstances. Until recently, Alberta has served as a cautionary tale 11 on the deposit side because it set no firm figure for deposits Pg 5, Managing the public trust: How to make natural resource funds work for citizens, Revenue Watch Institute, Vale Columbia Centre, available at: See page 3, See Clause 2, purpose at See page 21 of Managing the public trust: How to make natural resource funds work for citizens, Revenue Watch Institute, Vale Columbia Centre, available at:

5 Between 1987 and no deposits were made. The province changed the legislation in 2013 to establish set amounts. It is too soon to say whether they will be honoured. The legislation establishing the Quebec fund gives the responsible minister leeway to take money out at any time to repay debt or to pay a court judgment against the province if there is not enough money into the consolidated general fund. 13 Fund investment is also problematic, at least when measured against the best practices set out in the report. Using money from the savings funds for domestic investment is generally not advisable, according to the authors. It leads governments to use fund money for projects that should be financed out of the government budget. It frequently reduces transparency, because fund investments may not be disclosed in the same detail as investments made through the general budget. And it tempts politicians to push projects that might not otherwise qualify for fund support. Fund investment is also problematic, at least when measured against the best practices set out in the report. Using money from the savings funds for domestic investment is generally not advisable. In the early years of the Alberta fund, the government invested heavily within the province to meet the objective of strengthening and diversifying the Alberta economy. That objective no longer exists and the fund managers invest on the basis of where they might make the greatest returns, without incurring significant risk. But as Peter Mackinnon noted in his advice to the Saskatchewan government on setting up a fund in that province, a savings fund is not an economic development fund and investments within the province should not be privileged or preferred. 14 The new Liberal government in Quebec looks likely to ignore this good advice. During the recent election campaign, the Liberals said they would use money from the Generations Fund to invest in companies facing an unwanted takeover bid. 15 While this might be a politically popular move, it does not bode well for proper management of the fund See clause 7 and 9 of Bill , an act to reduce the debt and establish the generations fund at See Scope of Investments, pg 7 at f bf4f-fa051bc6182e&PN=Shared overnment+says+late/ /story.html 5

6 Resource-rich Canada is like the fellow who was born on third base and thinks he hit a triple, Mr Mulroney said in his speech. There are many things the three provincial funds do right. Alberta gets high marks for transparency and for the expertise of its fund managers. The Northwest Territories government wins praise for planning ahead and setting up its fund before resource revenues started to flow directly to the territorial government. And at least all three exist. Every province and territory with the exception of Prince Edward Island and Nunavut receives significant revenues from nonrenewable resources, yet only three of the 13 are setting some of that money aside for future generations. Resource-rich Canada is like the fellow who was born on third base and thinks he hit a triple, Mr Mulroney said in his speech. We take too much of what we have for granted believing mistakenly that our vast resources will generate prosperity just from being there. 16 He advises that agreement must be sought among the major players and interests for resource development to increase, bringing more benefits to Canadians. But for real long-term prosperity, Canadian governments must save the revenues from that development and invest the money for future generations

Today s Resources, Tomorrow s Legacy: NWT Heritage Fund Public Consultation

Today s Resources, Tomorrow s Legacy: NWT Heritage Fund Public Consultation February 2010 Foreword One of our greatest strengths as Northerners is the value we place on our land and its resources. The