Over the past 45 years, since Alberta entered the age of commercial production from its oil sands, the province has heard a common refrain from academics, business leaders and legislators.
They have called for a broadening of Alberta’s economic base to reduce its heavy reliance on oil and natural gas revenues.
The catch-cry has been contained in one word: Diversification.
But the idea has mostly been a tough sell as the province has cruised along on resource revenues that have accounted for up to 40 percent of its gross domestic product and the petroleum industry has continued to attract billions of dollars in external investment and hundreds of thousands of domestic and international jobseekers.
‘Made in Alberta’
Mark Milke, a senior fellow at the right-wing Fraser Institute, recalled that a government drive for a breakthrough in the 1980s and early 1990s included loans, loan guarantees and equity stakes in companies outside the energy sector.
That includes “made in Alberta” banks, trust companies and investment firms until a mid-1980s collapse of oil prices took down many of the provincially guaranteed financial institutions, some of them mired in scandals and others heavily invested in real estate.
The cost to the Alberta government of these failed ventures was C$1.8 billion.
Undeterred, the government continued down the same path in forestry, meat packing, waste treatment and high-tech, but defaults and foregone capital investments cost the taxpayers another C$2.2 billion.
“These efforts didn’t help Albertans adjust to a new reality or diversify the economy,” Milke wrote. “It was simply activist industrial policy, where governments picked winners and losers.”
Although Texas had demonstrated that moves into high tech, manufacturing and banking have boomed that was the result of “getting the basics right” - including low business and personal tax rates and a flexible labor market, he said.
Those same aspects were woven into the Alberta Advantage from 1994 to 2013, when the average annual jobless rate was held at 5.4 percent through boom and bust cycles, compared with 7.3 percent in British Columbia, 7.4 percent in Ontario and 9 percent in Quebec.
Another stab at diversification
Now, following the election of the New Democratic Party government led by Rachel Notley, Alberta is being positioned for another stab at diversification, after tumbling in only a few years from its debt-free status to flirting with recession.
On Notley’s agenda is a pledge to work with business leaders and build a more all-encompassing economy that will give Alberta an alternative to the maddening volatility of oil and natural gas prices.
She said she intends to “work closely with partners in business and industry” to pursue the elusive goal.
Beyond that details are scarce, although Notley has sided with unionized labor in again floating the idea of upgrading and refining oil sands bitumen in the province and overcoming the opposition of other Canadian and U.S. jurisdictions to allowing crude bitumen to be moved by pipelines across their territories.
The new premier has set a sweeping list of businesses to promote: alternative energy, high tech, advanced research, knowledge industries, film and television production, wind power, forestry, value-added agriculture, food processing, tourism and - a real crowd-pleaser - encouragement of micro-breweries.
10% hike in spending
What troubles Notley’s critics is that her goal of achieving diversification is essential to pay for the NDP’s election platform that calls for a 10 percent hike in government spending over the next five years, higher top marginal tax rates of up to 15 percent, a rise in corporate tax rates to 12 percent from 10 percent, a 50 percent hike in minimum wages to C$15 an hour and a vague promise to move more jobs from Texas to Alberta.
To many Albertans that sounds like a grab bag of all the tired and unsuccessful ideas from the past mixed with ingredients that will not only discourage investors and could see many packing their bags, as they did in 2008-09 when the Alberta government of that time saddled oil and gas producers with higher royalties.
Notley’s apparent belief that an Alberta-based upgrading and refining sector could be the magic answer to jobs and revenues is the one that causes the greatest unease in a province which is only now close to bringing its first upgrader on stream since Shell completed a refinery near Edmonton in 1984 and in a continent where there is little or no enthusiasm in the private sector for taking on the risks of building new refineries.
‘Multibillion-dollar boondoggle’
A recent paper by former Alberta Finance Minister Ted Morton on the government-based North West Upgrader, which he said has been driven by the “diversification siren song of ‘Refine It Where You Mine It,’” underscored the risks of governments engaging in such ventures.
“What began as a low-risk, low-cost project to encourage domestic bitumen upgrading has morphed into a multibillion-dollar boondoggle” that could cost Alberta taxpayers C$26 billion and translate into processing costs of C$63 per barrel,” making it almost impossible for the investment to break even,” he said.
Morton said the risks of embarking on bitumen upgrading became greater when the government committed itself to toll payments, loans and loan guarantees to help the project lure investors.
He said the government caucus that signed on to the North West Upgrader arrangement was sold on the notion of capturing the “value-added” end of upgrading, but heard “almost nothing about the significant financial risk” that the government was assuming.
Morton said the government also committed C$2 billion to a carbon capture and storage component as part of a carbon dioxide reduction strategy.
He said economic diversification projects often tend to be motivated by politics rather than economic viability and the economic risks are seldom assessed by qualified, independent professionals.
Morton, who claimed his efforts to scrap the North West upgrader were brushed off by then premier Ed Stelmach, said there is a tendency for governments to take most of the risks, provide most of the capital and receive the smallest share of profits.
