PREMIER OF ALBERTA

Economic Diversification

Can the Notley government reduce our reliance on oil and gas?

By Donna Kennedy-Glans

When I sat on the Alberta Treasury Board, but a few short years ago, we were talking about investing provincial surpluses in the Heritage Fund. Today? Our oil-and-gas-dependent economy is in free fall. Low oil prices mean royalty revenues are expected to drop by 90 per cent this year, to $1.4-billion, the lowest in 40 years. The NDP government is continuing to spend on services and initiatives despite the shortfall, this spring tabling a $10.4-billion deficit budget, the largest in Alberta’s history. First quarter results from August have this deficit growing to nearly $11-billion. By the end of  fiscal year 2018–19, the province will be $35-billion in debt.

Industry estimates that Alberta could lose 125,000 direct and indirect jobs related to oil and gas by the end of 2016. The province hasn’t seen so many jobs disappear so quickly since 1982, then owing to a global recession. Our 8.6 per cent unemployment rate in July 2016 was the province’s highest since 1994. One of those statistics was my youngest son, a newly minted chemical engineer, fired at Christmas. Like many families in Alberta, we’re living the free fall.

Alberta leans heavily on non-renewable energy for high-paying jobs, and has become dependent on the sector for government revenues. The question facing our leaders is: What do we do now? Some are calling for reducing revenue volatility by implementing a sales tax. But “this government has said it will not do that,” Finance Minister Joe Ceci said in late April to reporters. “That commitment is pretty ironclad. And we have to find other ways to make this happen, and we will.” The NDP government did, however, raise corporate taxes to 12 per cent from 10 per cent.

For the Notley government, economic diversification remains the priority. This means encouraging many different enterprises to produce a variety of products, services and technological processes to overcome our dependence on an industry that typically represents around 30 per cent of Alberta’s GDP. The choice to invest in diversification is interesting given its contentious history. “Diversify the economy,” in Alberta, is old advice with renewed urgency. Our workforce may already be diverse, but oil and gas employment is surprisingly precarious and provincial revenues are too closely tied to the fate of one industry.

A 2011 report by David Emerson, chair of the Premier’s Council for Economic Strategy, told the then-PC government to broaden our economic base “to reduce the vulnerability that comes with heavy reliance on energy.” There was and is genuine political will to resolve this dilemma. When I was named associate minister of electricity and renewable energy in 2013, we were studying the choices and the appropriate pace of change to foster diversification of our energy economy.

Some Albertans don’t like government “meddling” in the economy or labour market and would have us wait out low oil prices. Premier Notley is in a Catch-22. If she acts but invests in losing ventures, citizens will be upset. If she doesn’t take risks, and revenues and employment don’t improve, she’ll be blamed for inaction.

Meanwhile, if oil prices suddenly rise, we’ll all breathe a sigh of relief—but only until the next bust.

Every Alberta premier has a diversification tale, but Peter Lougheed’s choices are legend. Lougheed invested public dollars in a range of companies, with spectacular successes and equally spectacular failures. Winners included Alberta Energy Company (later renamed Encana) and Syncrude (an oil sands pioneer). Losers include MagCan (a magnesium plant), Canadian Commercial Bank, Gainers (a meatpacking plant) and NovaTel (the cellular subsidiary of Alberta Government Telephones), none of which survived.

These and other investments were political. The government launched Alberta Energy Company in 1973 as a public–private joint venture to reduce our dependence on foreign oil. The decision proved popular with Albertans; AEC’s initial public offering attracted 60,000 buyers and the shares split three for one in 1980. Lougheed purchased Pacific Western Airlines in 1974 to protect Alberta’s position as gateway to the North and prevent BC’s NDP government from acquiring the airline. This choice caused a public outcry. Even now, decades later, when a provincial politician is tempted to wrap themselves in the flag to support direct investment in a commercial enterprise—perhaps equity participation in a refinery or a pipeline—someone will lean in and whisper, “Remember PWA and Peter the Red?”

What will Premier Notley contribute to local lore? One year ago her government created the Ministry of Economic Development and Trade. Minister Deron Bilous’s mandate is to lead efforts “to diversify [Alberta’s] economy, strengthening existing sectors and finding new opportunities.” Notley replaced the province’s Economic Development Authority with a 10-member expert panel chaired by University of Alberta business dean Joseph Doucet, which advises her on diversification. Her government announced a second such panel in February focused specifically on energy diversification.

For Justin Riemer, an assistant deputy minister in Economic Development and Trade who for 17 years has focused on diversification, Notley’s goal is clear. “Manitoba is the most economically diversified province in Canada,” he says. “But Alberta doesn’t necessarily want to look like Manitoba. We’re not trying to even out the pieces of the GDP pie to be equal, with the tourism slice as big as the energy slice.” GDP growth in the most promising sectors, he says, stabilizes revenues.

The ministry tracks employment, but it’s difficult to forecast jobs and even trickier to incentivize job creation in a bust economy. The strategy, says Riemer, is to grow sectors that add higher-paying jobs. With unemployment rising, however, might government be tempted by any and all employment? Riemer recalls a project with Dell and the City of Edmonton to set up a call centre and create 1,000 minimum-wage jobs. The company left Alberta in 2008 after less than three years—a cautionary tale, he says.

For 40 years the principles underlying Alberta’s approach to diversification haven’t much changed. Bureaucrats, politicians and citizens repeat the same mantra: Play to our strengths and diversify within energy, not away from energy.

In other words, be honest about our province’s unique attributes: our climate, weather, isolation and distance from markets offer challenges, though our self-reliance, wariness of external dependencies, abundant natural resources, young infrastructure and strong education system are strengths. This was the thinking behind Lougheed’s transition from conventional energy to oil sands—we’re sitting on one of the world’s largest oil deposits, and we have the educational savvy to figure out how to get at it.

So, based on these principles, it’s not surprising to see our government now betting on petrochemicals. In February Minister Bilous announced a 10-year, $500-million royalty credit program for this sector—bittersweet for me, because this was the exact program I’d championed within the previous PC government. By June the government had received 16 applications to the program, “representing more than $20-billion in potential new investment.”

How will the program work? Once new petrochemical plants are approved and up and running, royalty credits will be issued to the companies that built them. Bilous hopes to create 4,000 high-value jobs in places such as Redwater and Medicine Hat, of which 3,000 would be short-term jobs in construction. “It’s a new link in the value-add chain,” says Bilous, adding he anticipates “new petrochemical facilities that use methane or propane to produce materials for plastics, detergents and textiles.” In a single announcement the minister was able to check boxes on all of his government’s diversification goals: strengthen existing sectors; find new opportunities; create high-value jobs; attract investment; enhance market access.

Joseph Doucet endorses the strategy. Natural gas prices are woeful right now, royalties are low, and we’re at the wrong end of the pipe for North American gas. “Petrochemical investment in Alberta seemed unlikely seven or eight years ago, with the price of gas in Qatar so low.” But now, he says, “petrochemicals in Alberta using cheap gas makes sense.”

Royalty credits—the approach taken with the Petrochemicals Diversification Program—and temporary royalty holidays appeal to people such as Doucet, who prefer investors with “skin in the game.” We’re familiar with the strategy; Premier Klein kick-started oil sands production in the 1990s with a generic royalty regime that saw companies pay a nominal royalty of 1 per cent until all project costs were recovered. Many Albertans like companies to remain on the hook for risks. Some, however, warn of a “slippery slope.” I recall questions from dozens of my constituents on Alberta guaranteeing loans to the North West Redwater Partnership upgrader. Some of these same people now warn about petrochemical incentives: They don’t want royalty credits or holidays or any other incentives paving the way for billion-dollar public funding of private-sector companies.

While the petrochemical investment generated headlines, a wide range of policy options continue to be evaluated by our government.

Tax credits can stimulate investment in targeted sectors and reward risk-taking. For a long time Alberta was one of the only provinces without an income tax credit for small business investors. Proponents of such an approach, including Mel Wong, president and CEO of BioAlberta, says it works well in other provinces, especially in BC, for high-tech start-ups. Likewise the Calgary Chamber of Commerce encourages tax credits, also pointing to BC’s experience: “Over a seven-year period, BC’s program was able to turn $250-million worth of tax credits into $2.3-billion of equity investment, creating 4,000 jobs and having a net positive impact on provincial revenue.”

The NDP government was listening. Its 2016 budget allocates $165-million to fund two new approaches starting in 2017, including the Alberta Investor Tax Credit, which provides a 30 per cent tax credit to investors who fund Alberta companies in IT, clean tech, health tech, interactive digital media and games and in the post-production, visual effects and digital animation sectors. Its Capital Investment Tax Credit encourages business to spend on equipment and buildings.

The success of The Revenant at this year’s Oscars also rekindled calls for lifting the monetary cap on the Alberta Production Grant, a unique film incentive that’s credited against production expenses incurred here. Jean Merriman, a local film industry veteran, explains: “Alberta has interesting and diverse backdrops—mountains, prairies, the snow—and we’ve proven to foreign producers that we have stellar crews and infrastructure. But that’s not enough. We also need to be competitive and bottom-line driven.” By Canadian standards Alberta is a large filmmaking centre, responsible for roughly $400-million in economic activity over the last five years. Yet our numbers pale by comparison to the powerhouses of Ontario and BC, each with $1-billion-plus industries.

Tax cuts for businesses and public dollars for training and apprenticeships are other options that can stimulate diversification and job creation, and both approaches were deployed by the NDP in their 2016 budget. The small-business tax rate was reduced from 3 per cent to 2 per cent, a cut that Joe Ceci initially believed would create 100,000 private-sector jobs over three years. The same budget dedicated $25-million to fund apprenticeship and training programs. Yet these measures aren’t working. “The government is not able to shore up the job losses that have happened in private industry,” said Ceci this August.

Investment in research and development is another staple. Our government has always funded basic post-secondary research, and much of this is now coordinated under Alberta Innovates, with emphasis on agriculture, food, forestry, energy, environment, health and commercial use of new technologies. What many Albertans may not fully appreciate is our province’s breadth of specific research priorities: biorefining and biocomposite materials, nanotechnology, cleaner energy production and alternative energy, cardiovascular health, brain health, diabetes, biomedical technologies and infectious diseases.

On a per capita basis, Alberta governments’ R&D expenditures are among the highest in Canada. It was my experience as an MLA that most Albertans were comfortable with this. Even fiscally conservative constituents were supportive of R&D that advanced our province’s competitiveness or solved real problems—but they expected to see evidence of outcomes.

Agriculture is another long-time Alberta strength, so it’s not surprising the government is trying to find new markets for our crops, livestock and related products. In 2015 sales of Alberta processed food and beverages were a record $14.6-billion. In March Bilous travelled to Guangzhou, the business hub of southern China, to open the province’s third international office in that country. Connecting the dots between trade missions and market access, Ray Price, president of Trochu’s Sunterra Meats, welcomed the opening. “Alberta’s offices have been instrumental in helping Sunterra develop productive trade relationships in regions around the world, and I’m confident the Guangzhou office will help increase our access to the southern China market,” he said.

Another option—one that Premier Notley has embraced—is direct investment in local companies. Alberta’s 2015–16 budget set aside $1.5-billion to ATB Financial to lend to “entrepreneurs and job creators” and $50-million to the Alberta Enterprise Corp. (AEC) to “support the development of a vibrant venture capital market.” This approach is not new. In 2009 the PC government gave AEC $100-million to invest in venture capital funds willing to consider local companies. In five years that money was parlayed into $290-million invested in 27 businesses and more than 1,000 direct jobs. To sustain this momentum, AEC invested $5-million this February as a limited partner in Avrio Ventures III, a $108-million Calgary-based agriculture and food technology venture capital fund. Another $25-million was directed to AEC in the April 2016 budget.

Our new government has gone further, however, directing the Alberta Investment Management Corporation (AIMCo) to allocate 3 per cent of its Heritage Fund investments—some $540-million—to “growth-oriented companies” in the province. Allocating public money to private companies is tricky, with politicians open to charges of cronyism. Decisions will need to be made transparently and on merit, with authority delegated to arm’s-length regulators or quasi-governmental bodies. Notley has said she’ll leave the final decisions about direct investment to ATB Financial, AEC and AIMCo.

A closed-loop industry levy also can spur diversification. The Climate Change and Emissions Management Corporation’s (CCEMC) use of large emitters’ carbon levies, for example, helped fund Edmonton’s SBI BioEnergy’s renewable transportation fuel facility. CCEMC’s projects are expected to prevent 12.5 megatonnes of GHG emissions by 2020, largely through innovation in biofuels and chemical manufacturing and from electricity made using renewable sources, forest products and landfill.

Pembina Institute’s Clean Economy director Sara Hastings-Simon is enthusiastic about Alberta’s new $30-a-tonne carbon tax and the implications for economic diversification. Taxpayers understandably question where such dollars flow. As an MLA I was grilled by citizens who bemoaned the closed loop between carbon levies and CCEMC, characterizing this as cycling money from industry back to industry. Conversely other Albertans would have been unhappy with carbon tax proceeds going to general revenues rather than to GHG reduction.

Governments can also try to help businesses commercialize. A $10,000 Alberta Innovates microvoucher paved the way for TCB, a welding, manufacturing and fabrication company in Brooks, to commercialize the SilverJack, a patented pumping system. Yet such successes aren’t usually so directly tied to government. Ken McKinnon, former director at Alberta Innovates–Technology Futures, cites Critical Mass, a Calgary digital design agency “grown from five guys to a global presence with over 400 employees,” and Mel Wong points to the recent expansion of Edmonton’s Raylo Chemicals plant by multinational Gilead Sciences, which now employs nearly 500 Albertans. The government, he says, simply created the economic conditions for these companies to succeed.

One challenge is the high cost of late-stage commercialization—finding, for example, the estimated $100-million needed to commercially demonstrate proprietary technology developed by MEG Energy to remove diluent from bitumen in a partial upgrading process. Another is that a smart idea can be developed in Alberta only to see its originator relocate to a bigger market. At least seven companies in the medical device business have left Alberta in the last three years because they can’t test their ideas here, says Wong: “The latest to leave, Innovative Trauma Care, went to the US.”

Ultimately, economic diversification means creating solutions to problems. What does the rest of the world need? Yes, they still need our oil, beef, grain and timber and the know-how amassed in developing these sectors. But we should also ask: What problems do we have in this province the resolution of which would, first, have a clear public benefit to Albertans and, second, position us to export that expertise?

Exporting solutions to the world isn’t new for Albertans. Premier Lougheed’s government, anticipating the eventual end of the province’s conventional oil, funded the Alberta Oil Sands Technology and Research Authority, whose scientists paved the way for oil sands development. Lately we’ve exported that know-how to places as diverse as Kazakhstan, Venezuela, Utah, Mexico, Russia and China.

The problems of oil-and-gas dependence—and the challenge of economic diversification—aren’t borne by the province alone. At every level of government, diversification is a rallying cry. The federal government offers entrepreneurs industrial research grants and tax credits. Many municipal governments in Alberta, even in towns and rural communities, have diversification hopes emerging from a competitiveness review or stewarded by the chamber of commerce. Medicine Hat’s leaders, for example, are pushing to diversify from oil and gas to alternative energy; the city now operates a solar thermal plant, the first of its kind in Canada.

Steve Allan chairs Calgary Economic Development, whose 26 member organizations—federal, provincial, civic and post-secondary—are implementing a resiliency plan. Integrating strategies across so many institutions, plus the private sector, requires uber-collaboration. Brad Zumwalt, founder of digital graphics success stories Eyewire and Veer Incorporated, likens this need for a collaborative approach to a barn-raising.

This isn’t our first crisis. In fact, because of our dependency on commodity markets, Alberta has been something of a bureaucratic laboratory for economic diversification. We’ve tried nearly everything from a policy perspective over the last 40–50 years. We’ve had the luxury of citizens willing to accept ambitious government mandates and we’ve also had the money to carry them out. Premier Notley has set aspirational goals and continues to invest heavily in diversification. Yet some of her strategies aren’t working, and Alberta’s growing debt constrains options. The challenge this time is bigger even than an economic slump and a low oil price. Shifting attitudes about climate change and firmer GHG-reduction mandates mean there will be no return to business as usual.

Donna Kennedy-Glans has worked as a lawyer, businesswoman in the energy sector and as MLA for Calgary-Varsity (2012–15).

 

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