Real Resource Superpowers Don't Squander Revenues

How many times do Canadian governments need to be told to save more resource revenues before the message sinks in, asks Madelaine Drohan.
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June 17, 2014
Madelaine Drohan
Canada correspondent for The Economist, Author of The 9 Habits of Highly Effective Resource Economies, and contributor to The Economist Intelligence Unit

How many times do Canadian governments need to be told to save more revenues from non-renewable resources before the message sinks in? The latest authoritative voice to call for this course of action is the Organization for Economic Cooperation and Development (OECD), which said in its June 11 report on Canada that “prudence and equity argue for saving gains from exploiting a finite resource and sharing them with future generations.” The International Monetary Fund made the same case in 2013 and in 2014, as have a host of others. The logic behind the idea made saving one of the 9 Habits of Highly Effective Resource Economies, the report I wrote for the Canadian International Council in 2012.

Yet the logic of saving and investing money earned from exploiting irreplaceable public assets seems to escape provincial governments, who with the exception of Prince Edward Island realize significant revenues from these resources. And it is rejected completely by the federal government, which collects few royalties but does rather well out of the corporate and personal income tax directly tied to the exploitation of oil, gas and minerals.

Some provincial resource savings funds exist. Alberta has its grossly inadequate Alberta Heritage Trust Saving Fund, set up 20 years before Norway started contributing to its fund. The two-decade lead didn’t do Alberta much good. At the end of last year, Alberta’s fund contained CAD$17.3 billion compared with Norway’s CAD$950 billion. Recent legislative changes requiring the deposit of at least some non-renewable resource revenues each year should help, said the OECD, “but the share is limited and the majority of energy revenues will continue to be spent on current goods and services.”

Quebec has its CAD$5.6 billion Generations Fund, which began with some hydropower royalties and is supposed to start receiving mining royalties next year. In a far-sighted move, the Northwest Territories set up a heritage fund in anticipation of the mining royalties that began flowing to the territory following devolution on April 1, 2013. But the British Columbia government has become vague about when it will set up its Prosperity Fund for natural gas revenues, promised prior to the 2013 election. And although Saskatchewan Premier Brad Wall was initially keen to set up a Futures Fund for his resource-rich province, he did not include it in his government’s 2014 budget.

A cynical take on this pitiful savings record is that politicians have such a short time horizon—four years for a majority government, usually a lot less for a minority one—that investing public assets for future generations rapidly slips down their list of priorities. It’s far more pleasing from a political point of view to dole out largesse rather than telling voters they should be living within their long-term means.

But they also do it because voters let them get away with it. The clamour for more schools, highways, social services or tax cuts is almost always louder than the call for governments to be prudent and equitable, as the OECD put it, with money from resource exploitation. Not enough Canadians understand that the resources sprinkled so liberally across much of the country—oil and gas, gold, potash, nickel, iron, uranium and chromite—belong to them and that as owners they should be receiving their fair share when these resources are removed and sold. The OECD report had an interesting chart showing what share of oil and gas profits governments captured on behalf of their citizens. Canada was near the lower end. Canadians lose twice when governments don’t collect a fair share of profits and then don’t save what they collect.

Of course, setting up a resource-backed saving fund is not a panacea for all society’s ills. But when structured and managed properly they set governments on a more sustainable fiscal course, spread the benefits of resource development across generations, and help mitigate the negative effects that resource booms have on the value of the currency and non-resource sectors. They also increase public support for companies exploiting the resource.

There is plenty of knowledge available a willing government could tap. Revenue Watch Institute and the Vale Columbia Centre released a study earlier this year in which they surveyed about 50 funds—tiny Timor Leste, which has only been a country since 2006, has a petroleum fund with US$14.6bn in its coffers—and came out with recommendations on best practices.

Politicians will claim that while people say they want the government to save and invest revenues from non-renewable resources, when push comes to shove they would prefer to see its spent on goods and services. There may be some truth to that but it’s not always the case. When the government of the Northwest Territories announced in 2014 that only 5 percent of resource revenues would be set aside in its heritage fund, there was so much opposition that the finance minister quickly bumped it up to 25 percent.

This suggests an answer to the question asked at the beginning of this piece:

Governments in Canada will start saving more of their non-renewable resource revenues when they feel the pressure to do so. That pressure has to come from the people who have the power to hire and fire them. Suggestions from groups like the OECD and IMF, however authoritative, can be brushed off far too easily.

Madelaine Drohan is the author of The 9 Habits of Effective Resource Economies, written for the CIC in 2012. She is also Canada correspondent for The Economist. These are her private views.