Friday, June 22, 2007

Royalties are only part of the equation

This was published as a forum peice in the Telegram today.


I have to respond to a recent Telegram column by Brian Jones called “Oil rich but dirt poor — what’s wrong with this picture?” (June 15). He argues that provincial governments from 1989 to 2003 were exclusively fixated on natural resource jobs to the detriment of natural resource royalties, and that royalties are the only way to accumulate wealth for the province.

I don’t have to trawl through every ministerial speech and statement or Hansard record for the time period he offers to show his statement is ridiculous. It should suffice to point to the latest provincial budget, which forecasted total direct revenues from offshore projects of over $1.25 billion this fiscal year, including over $1 billion in royalties alone.

Those funds, 21 per cent of total government revenues, come from projects for which negotiations concluded in the period 1989-2003. So, clearly somebody in those governments talked about royalties at some point.

Oddly, while this government has gone to war over an equity stake it doesn’t need — holding up a project we do need — it has been largely silent on the issue of economic development benefits and the associated employment opportunities.

As for his bald statement that “jobs are fine but real wealth comes from royalties, as any redneck can tell you,” Mr. Jones is dead wrong.

Royalties alone do not create provincial wealth; royalties increase government cashflow and provide cash for government spending and government jobs. But all that stops as soon as the royalties dry up.

Real wealth comes from building capital: human, physical and economic.

Human capital develops when local businesses and workers gain experience on one project and then apply that experience to other projects. Those workers at Bull Arm bought houses, cars, raised their children and fed their families on exceptional wages while gaining invaluable expertise and experience they can use anywhere. They accumulated wealth and the potential to earn more of it in the future.

We build physical capital when we construct infrastructure that can be used for other projects, here and around the world. The Bull Arm fabrication facility is an excellent example.

It would be nice to see a local equivalent of the Alberta multibillion-dollar Heritage Fund, and I strongly support that. We need to accumulate lasting economic wealth from this non-renewable resource. Right now, it all goes into general revenues with nothing put aside for the future.

When Mr. Jones and others argue for an equity stake by saying that our contribution to future projects is the simple ownership of the oil resource, they are partly right. In the same way you own a building and somebody wants to put in a store, you want to be compensated for that. But the benefit you extract from the ownership of the building is not an automatic equity stake in your tenant; it is rent. In the case of the oil resource, rent is called royalties.

We should note that the Alberta Heritage Fund was created with royalties and not from provincial equity stakes. Alberta does not own an oil company (they divested decades ago), nor does it hold equity stakes in local projects.

That government has to be front and centre and directly involved as an equity partner in industrial activity is a quaint point of view that has been thoroughly discredited in most parts of the industrialized world.

And that includes Norway, this government’s stated model for involvement in the oil industry. Over the last five years, the Norwegian government has been gradually divesting itself of its stakes in Statoil and NorskHydro.

Experience shows that the government has a poor track record in managing private-sector activities. Just look at the very long list of Smallwood/Peckford industrial schemes ranging from chocolate to boots to cucumbers to orange juice.

And I don’t mean to pick on the Newfoundland and Labrador governments in particular. Look across Canada and see the expensive skeletons of failed provincial government industrial projects of all kinds, from the Bricklin factory in New Brunswick to the fast ferries of B.C.

This province needs royalties for the government to function and to benefit the population as a whole. The people of this province need the business activity, jobs, skills, expertise and other opportunities the resource provides to be competitive in the wider world and to take advantage of local projects in the future.

We need them both — royalties and jobs. That’s how we accumulate wealth.

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