MOST CANADIANS assume that Alberta is getting filthy rich from its hydrocarbon resources. In comparison with Norway, however, Canada’s wealthiest province is failing to live up to its potential. Both jurisdictions produce about the same amount of fossil fuels and have populations of a similar size, but that’s where the similarities end. “Compared to Norway, Alberta is collecting peanuts,” notes Jim Roy, an Edmonton-based royalties consultant who advises several national governments. This Scandinavian nation knows how to save for the future, banking much more than Canada’s tar sands empire.
Alberta started off with the right idea, but failed to sustain it. In 1976, then-premier Peter Lougheed created the Alberta Heritage Savings Trust Fund (Heritage Fund) – the world’s first sovereign fund. He dedicated 30 per cent of all non-renewable-resource revenue to this rainy-day bank account. Later governments, however, stopped contributing to the fund or looted its coffers at their convenience. Today, the Heritage Fund’s value stands at a measly $17-billion, considerably less than its peak value in 1986 of about $12.5-billion ($22-billion in 2008 dollars). Moreover, the province has no targets for its fund nor does it have legislation with clearly laid out goals and outcomes.
In contrast, Norway took Lougheed’s brilliant idea and improved upon it. The Norwegians, for starters, kept the fund at arm’s length from politicians and, by law, must put a whopping 96 per cent of all oil revenues directly into the fund each year. They stash away a large chunk of their oil profits as well. As a consequence, Norway’s politicians, unlike their Albertan cousins, don’t have a lot of oil money at their disposal to corrupt the political process.
In the 18-year life of Norway’s well-managed petroleum fund (now called the Government Pension Fund), it has amassed $400-billion – more than 20 times what Alberta has managed to save in 32 years.
Oil-producing nations typically collect “economic rent” by capturing a percentage of oil taxes, royalties and land sales. If a government captures too much economic rent, it discourages investment, but if it captures too little, it encourages rapid and careless development – think tar sands. By Roy’s calculation (he did royalty reviews for the Alberta government in the 1990s) Norway takes approximately 80 per cent of the available rent while Alberta only pulls in between 30 and 40 per cent. The province’s Auditor General has repeatedly criticized the powers in Edmonton for failing to reach their mandated target of between 50 and 70 per cent. As a result, says Roy, “Alberta has among the lowest share of royalties and lowest share of economic rent in the world.”
This track record has caught the attention of international agencies. In its 2008 economic survey of Canada, the Organisation for Economic Cooperation and Development rebuked Alberta for not doing a better job of building its Heritage Fund. It also lambasted the federal government for not putting the taxes it collects from the tar sands (some $70-billion by 2020) into a transparent oil fund.
Norway has a save-now-and-spend-later philosophy, which should cushion the nation against future oil shocks. Booming Alberta, with its freewheeling save-little-and-spend-everything approach, seems poised to bust yet again.
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