News from The Globe and Mail
Time to rethink the Heritage Fund
Thursday, March 16, 2006
CALGARY -- It's time for Alberta to grow beyond being the centre of Canada's energy industry and become a financial player on a national scale.
The oil patch has learned over the past 50 years how to raise billions of dollars in financing, and it has pioneered sophisticated financial structures such as royalty trusts.
But somehow that expertise has not found its way into the management of the biggest single pool of capital in the province, the Heritage Savings and Trust Fund, which could become the platform that allows Alberta to take its place on a larger financial playing field.
As it stands now, the Heritage Fund has been anything but well managed and has not lived up to its potential.
When it was established in 1976 by former premier Peter Lougheed, the plan was to make annual contributions amounting to 30 per cent of the government's resource revenues. By doing this the province was recognizing that the cash rolling in came from resources that could not be renewed.
Within 10 years, the Heritage Fund was valued at $12-billion, but the province stopped putting money into it in 1988. After 30 years, by Dec. 31, 2005, it had grown to only $13.6 billion.
Shocking, isn't it?
Not only has the government not been putting more money in, it has been transferring a percentage of the annual returns to the amorphous General Revenue Fund, which is used for "priorities like health care, education, tax reduction and to help pay down the provincial debt." In other words, it is spent, not invested.
But there is yet another reason for the Heritage Fund's lousy performance: It hasn't been managed properly from an investment standpoint, although the government claims in its brochure about the fund that it "is managed and invested to provide the greatest financial returns over the long term."
Let the numbers speak for themselves.
In the past five years, it has shown an average annual return of 5.7 per cent. In whose book does this figure qualify as a great return?
But this speaks to the Heritage Fund's stewardship. Instead of looking all over the world and drawing on the expertise used by the best investment funds, the folks overseeing Alberta's nest egg are anything but financial wizards. The nine-person standing committee responsible for overseeing it is made up entirely of members of the Alberta Legislature, while the endowment fund policy committee has but three names with any investment credibility -- and none of them are associated with anything remotely resembling cutting-edge finance.
This is definitely not the way to manage a $12-billion pool of capital.
Consider this: Every company in Canada looking to raise capital -- and this includes both private and public entities -- will go to outfits like the Ontario Teachers Pension Fund ($88-billion), OMERS ($37-billion), the Caisse de dépôt et placement du Québec ($100-billion) to see whether they are interested in buying shares.
Why shouldn't the Heritage Fund be on that list too?
It doesn't stop there. There are arms of each of these organizations that specialize in valuing real estate, infrastructure projects, emerging equities and other investment vehicles, going beyond the bread and butter of stocks and bonds.
In short, these are actively managed pools of capital that generate impressive returns while also managing risk appropriately. Teachers, for example, has an average annual return of 11.3 per cent since 1990.
By contrast, the Heritage Fund has been passively managed and the returns speak for themselves; if it were a mutual fund, investors would have taken their money and headed for the hills long ago.
Last year, the Alberta government netted $9.8-billion in royalty revenues from the energy sector, and this year the number is expected to be $15-billion. If we had gone back to a 30-per-cent annual contribution threshold two years ago, the Heritage Fund would have grown by $7.4-billion, and that's before compounding. Instead, it's getting $1-billion this year -- roughly the same amount of money that flows into provincial coffers from gambling revenue every year.
While a larger pool of capital and better returns are one thing, there would be intangible benefits associated with proactively saving and managing the wealth generated by non-renewable resources. Alberta wouldn't be looking like the irresponsible nouveau riche kid on the block who doesn't have a clue about money.
There are all sorts of good reasons to reconsider changing the mandate and structure of the Heritage Fund. To do so would be no small task and the current government probably lacks the energy and political will to do anything of the sort.
But it would be a great gift to future generations of this province, not to mention Canadian businesses looking for funding. One of the biggest ironies is that the manner in which the Heritage Fund has been managed runs contrary to the entrepreneurial spirit of this province -- where risking capital every day in the energy sector is a way of life.
It's high time this inconsistency was set right.
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