Digging Deep for the Heritage Fund: Why the Right Fund for Alberta Pays Dividends Long After Oil Is Gone

Abstract

Albertans have long been aware that while their provincial government has shown a lack of consistent discipline in investing oil royalty revenues in the Alberta Heritage Savings Trust Fund, the Norwegians have been showing oil-rich jurisdictions just how effectively saving can be done. While Alberta’s fund was established in the mid-1970s, more than a decade before Norway began its national savings program, the Norwegian fund was worth more than $900 billion as of the beginning of 2014; Alberta’s is worth roughly $15 billion today, revealing the province’s inability to stick with firm, routine contribution commitments, and its occasional habit of using the fund’s earnings to cover spending priorities. But while many economists, politicians and pundits from both the left and right have long pointed to Norway as the model for Alberta to follow, it would in fact be wrong for Alberta to mimic Norway’s strategy. Indeed, the right plan for Alberta can set the province up in better shape for the future than even Norway will be. The Norway approach will inevitably prove unsustainable. As it is, Norway deposits all resource revenue into its fund, which then distributes a dividend to the government every year worth four per cent of the fund’s wealth. As the fund grows, so to does the size of the dividend. Yet, as wealth is converted from belowground assets (oil) to aboveground assets (cash and investments), the belowground wealth becomes gradually but inevitably depleted. At some point, all of Norway’s oil wealth will have been converted into aboveground assets, and the dividend will eventually have to be adjusted downward. A more sustainable approach, and one that Alberta should pursue, is one where the dividend is a falling proportion of fund assets. In other words, the province will want to calculate an appropriate dividend that is a fraction not just of the size of the financial fund (aboveground), but a constant fraction of total wealth — the value of the belowground assets and the aboveground asset portfolio. This ensures that the dividend grows in line with GDP. What is feasible for Alberta is an ongoing resource dividend equivalent to 30 per cent of government revenue. In order to achieve that goal, the province will have to build the fund such that it is worth the equivalent of 40 per cent of provincial GDP by 2030, 100 per cent of GDP by 2050, and 165 per cent of GDP in the year 2100. This means that within just the next 16 years, the Heritage Fund will need to be worth $200 billion in order to achieve its first benchmark — more than thirteen times its current size. Note the differences here with the recommendations made by the Alberta Financial Investment and Planning Advisory Commission (the Mintz commission), which advocated saving a fixed percentage of Alberta’s resource revenue each year, and set a 2030 target at just half that size.

But what this plan does have in common with the Mintz commission’s recommendations is that it requires the Alberta government to finally become serious about preparing itself to preserve wealth for future generations through the use of disciplined and meaningful investment in the resource fund. A serious investment approach also must mean that the fund should not be used as a source of capital investment to favour businesses in the province; Albertans have perfectly good access to capital markets, and worthwhile investments can and should compete for capital funds on their merits, not their location. Quite the contrary, a properly diversified Heritage Fund should be investing largely, if not entirely, outside the province. Most importantly, of course, is that Albertans need to insist that their government commit to a strategic plan for investing its oil revenue. Alberta can create a better fund strategy than Norway’s for ensuring economic sustainability through future generations, but first it must finally get serious about doing it.