Economic Diversification
Author’s intro:
The Alberta NDP has no business being in business. Yet they are carelessly spending billions of our dollars picking winners and losers, while failing miserably to create an environment that will diversify the Alberta economy. Instead of sound policy to stimulate a climate that encourages growth and investment, we get botched boosterism, punishing taxation and massive government subsidies with no focus or plan for successful execution. I’ve studied economics, have the practicality of being a small business owner and have shaped policy efforts on the national and provincial political scale. A robust and sustained diversification strategy is of critical importance for Alberta’s future. Without it, we won’t ever be able to balance out the boom and bust cycles of our resource industries and ensure the sustainability of our valuable social programs and quality of life. We need economic growth now, not more economy-stifling tax increases.
In a three-part series, I will provide you my observations of some of the catastrophic mistakes the NDP have made, followed by some thoughts on Alberta’s strengths and weaknesses and how we can address both to create a strong business ecosystem and re-light the Alberta Advantage. Finally, I will end the series with some specific ideas gleaned from discussions I have had with many people I respect in the academic and business sectors.
PART ONE:
NDP’s botched, costly and gimmicky efforts at diversification are destroying the Alberta Advantage
Its time to create a dynamic business climate and then get out of the way
Some will give Rachel Notley some credit. For somebody who marched in anti-oil sands protests, the Alberta Premier has done a decent job cheerleading on behalf of certain pipeline projects. Of course, standing up for Alberta’s resource industry should be one of the very basic tenets of the job.
But behind the boosterism of Notley and members of her front bench (seen high-fiving the stunningly surreal nationalization of the Trans Mountain pipeline project) stands a weak-kneed government complicit in the federal Liberals’ bitumen barrier regulatory regime. It’s a regime that has chased away investors and killed private sector projects all in the name of the absurdly elusive and impossible chase for “social license.”
That shouldn’t be a surprise since the NDP brought into circles one of the biggest energy project assassins Canada has seen in the past two decades. The decision to bring activist Tzeporah Berman on a government oil sands advisory committee would be laughable if it wasn’t so irresponsible.
Berman is now rallying against the TransMountain pipeline project, the last project still on the board to get our oil to tidewater and lucrative markets around the world.
So we still don’t have certainty over a pipeline, but we do have an economy-stifling carbon tax that the NDP remains stubborn to hang on to despite more and more provinces jumping ship due to the chilling impacts it has had on investment and the lack of environmental benefits.
Past the grin of Alberta’s Finance Minister is a botched batch of populist beer boosterism that has already cost Alberta taxpayers millions and threatens to cost hundreds of millions more through the erection of the same trade barriers that it rails upon others to knock down.
A clumsy and ill-advised effort to regulate Alberta’s electricity sector while triggering the abandonment of power contracts by producers has left valuable resources stranded, chilled investor confidence and has cost taxpayers billions and will cost billions more if this government is allowed to proceed down this dangerous track.
But perhaps worse than all of that, this premier and this government have let Albertans down through a flimsy, costly and poorly thought out effort at economic diversification heavy on red tape and the historically tried and failed policy of picking winners and losers.
We desperately need a common-sense plan to diversify our economy – one that helps provide the best conditions for business and start-ups and does not spend your money deciding which industries it should support.
We need a diversification policy that helps incentivize and attract investment that can compete with the high-powered corridors in Ontario, B.C. and Quebec who have come forward with a variety of sound policy innovation supports, structured in many ways.
More bitumen bumbling
Recently, the NDP announced another multi-billion-dollar plan for diversification. One part of the plan is to invest several billions of your money in partial bitumen upgrading in the province.
The theory behind this is that with partial upgrading, the demand for diluent (a light hydrocarbon that dilutes and allows the thick product to travel to market) is reduced and therefore pipeline capacity/efficiency will be increased to the tune of about 30 per cent per barrel. The program would see the government investing in these projects (up to about five) through loan guarantees etc.
Basically, this is the provincial government getting into the risky venture capital business. AGAIN.
In the government’s promotional material on this program they offer up a study done by three academics who think that this type of project has some promise. Sounds great right? There is one caveat in the study, which was conducted in 2017, and it is this:
“But there remains the critical task of proving partial upgrading technology at a higher scale than current testing.”
So, what these respected academics are telling us is that this technology is not economically scalable, but the NDP thinks it is? That’s scary. Perhaps we should be answering this question first: Should government be directly subsidizing business of any scale – proven or not?
Not everything needs the hand of government and needs billions of our dollars to be successful.
How impressive would it be for government to use the full tool box of policy options instead of direct cash outlays or subsidies to drive a robust venture capital environment?
More picking winners and losers and red tape
NDP meddling, has also paralyzed a program brought in by the previous government, meant to encourage investment in non-traditional sectors with strong job creation potential.
NDP changes to the Alberta Investor Tax Credit (AITC) - which offers a 30 per cent tax credit to investors who provide capital to Alberta small businesses doing research, development or commercialization of new technology, new products or new processes – have put the program in a state of paralysis.
Not only has the NDP chosen which sectors can participate, it has introduced an overly arduous, bureaucratic and costly process where both prospective businesses and investors must apply to take part. So, while start-ups and investors are filling out paperwork for some bureaucrat in Edmonton to review, we are being bypassed by other jurisdictions who have a more straightforward approach to investment matchmaking.
I can’t emphasize enough how this unhelpful government business intervention must be replaced by a real and robust and sustained diversification strategy. Without it, we won’t ever be able to balance out the boom and bust cycles of our resource industries and ensure the sustainability of our valuable social programs and quality of life.
Author’s intro:
The Alberta NDP has no business being in business. Yet they are carelessly spending billions of our dollars picking winners and losers, while failing miserably to create an environment that will diversify the Alberta economy. Instead of sound policy to stimulate a climate that encourages growth and investment, we get botched boosterism, punishing taxation and massive government subsidies with no focus or plan for successful execution. I’ve studied economics, have the practicality of being a small business owner and have shaped policy efforts on the national and provincial political scale. A robust and sustained diversification strategy is of critical importance for Alberta’s future. Without it, we won’t ever be able to balance out the boom and bust cycles of our resource industries and ensure the sustainability of our valuable social programs and quality of life. We need economic growth now, not more economy-stifling tax increases.
In part one of the series I provided you with my observations of some of the catastrophic mistakes the NDP have made. I continue this part on providing some thoughts on Alberta’s strengths and weaknesses and how we can address both to create a strong business ecosystem and re-light the Alberta Advantage.
PART TWO:
Examining Alberta’s inherent advantages and disadvantages can help us hone in on a successful diversification plan
What are Alberta's advantages in this fiercely competitive market? Today, it is unused economic capacity including such things as low-cost and ample office space, but most importantly a highly educated professional population and established expertise in oil and gas, GPS, agricultural, agri-food and medical technologies, among others. Alberta also offers an attractive value proposition: an attractive lifestyle environment with comparatively strong social harmony and cohesion, a tolerant multicultural society, low crime, a universal health care system and access to the world's single largest market – the U.S. One of our most powerful potential advantages is that we have the conditions to provide one of the world’s most attractive tax environments to attract capital, innovators, entrepreneurs and business. However, much of that has been frittered away by Ottawa and the Alberta NDP, which is at the heart of our current disadvantages.
To be successful, we must realize that diversification is a long game that requires patience and consistency. We must also be brutally honest with ourselves about our competitive disadvantages. Some of these include the geographical distance from major markets and, due to government policies, increasing energy costs. We also lack internationally recognized clusters of sector and managerial expertise and innovators beyond the energy and agricultural industries. Additionally, we also more experienced private sector seed and growth capital in areas apart from the conventional hydrocarbon and real estate sectors.
This does not mean that there is no innovative and entrepreneurial expertise outside the traditional Alberta sectors. There has, is and always will be. The problem is that much of the talent has historically had to make the difficult choice to leave Alberta to access opportunities and capital elsewhere to realize their ambitions.
We also must recognize that while our resource revenues provide the capacity to offer important tax advantages, our actual tax advantage for businesses and investors versus other Canadian provinces and the US has disappeared. This has been largely caused by a federal and provincial government that seems determined to send an anti-business message to investors.
We are being economically starved by the disastrous, cumbersome and often-unnecessary regulatory burden placed on us by the Alberta NDP and federal Liberals. Approval processes are too long and duplicative, driving away not only seed capital but also stifling the necessary follow-on capital. Our prospects for growth are wasting away.
Given these challenges what can, or should our provincial government do? There is much that a provincial government can do. However, there should be less emphasis on programs that provide direct government funding and/or result in government officials and bureaucrats meddling in decisions which properly belong in the free market. The emphasis should be on providing the environment and conditions for innovation and growth to thrive. Entrepreneurs and investors are much better positioned than bureaucrats to determine where and how their efforts and capital should be allocated.
Much of the lack of our international competitiveness is due to current federal tax policies. Canada, with a combined average federal-provincial corporate tax rate close to 27 per cent, now has one of the highest rates among 33 OECD countries. A provincial government has an important role to play in intergovernmental relations, including the First Ministers’ mechanism to effect regulatory and tax changes at the federal level. However, it is critical that the Alberta government get it right for those areas under provincial jurisdiction. A key first step is to signal to investors and the private sector that Alberta understands and is supportive of: private enterprise, the global, national and local investment communities, and innovation and growth in general.
For any jurisdiction to do well in venture capital investment—and, in turn, reap the innovation benefits of venture capital investment—it needs three things: people or organizations with money to invest, firms worth investing in, and mechanisms to link the two groups. There are enough pools of capital in Alberta to fund a thriving technology sector. One problem is that only a small portion of this capital is invested in early stage technology initiatives. Why? One reason is because after-tax returns are lower than what is required given perceived risk. Additionally, many investors lack experience and knowledge in these other sectors. There is also a lack of quality deals i.e. strong management teams with a great concept and plan.
The single most important thing that the government can do is utilize its fiscal flexibility to provide the most attractive environment to attract investment capital into new and growing business. The focus should be on rewarding private investors for risking their capital, and providing indirect support to entrepreneurs for assessing and determining the best business ventures, developing their management teams and supporting ongoing mentorship as innovators move through to commercialization.
Alberta’s inherent economic advantages and disadvantages must be addressed to help build a dynamic and outstanding business ecosystem that will help us recapture the Alberta Advantage.
In the next segment, I will outline some specific policy initiatives that must be explored in order for us to help create an attractive and dynamic business ecosystem.
Author’s intro:
The Alberta NDP has no business being in business. Yet they are carelessly spending billions of our dollars picking winners and losers, while failing miserably to create an environment that will diversify the Alberta economy. Instead of sound policy to stimulate a climate that encourages growth and investment, we get botched boosterism, punishing taxation and massive government subsidies with no focus or plan for successful execution. I’ve studied economics, have the practicality of being a small business owner and have shaped policy efforts on the national and provincial political scale. A robust and sustained diversification strategy is of critical importance for Alberta’s future. Without it, we won’t ever be able to balance out the boom and bust cycles of our resource industries and ensure the sustainability of our valuable social programs and quality of life. We need economic growth now, not more economy-stifling tax increases.
In the first two parts of this three-part series, I provided you my observations of some of the catastrophic mistakes the Alberta NDP have made and then followed that up with some thoughts on Alberta’s strengths and weaknesses and how we can address both to create a strong business ecosystem and re-light the Alberta Advantage. Today, I will end the series with some specific ideas gleaned from discussions I have had with many people I respect in the academic and business sectors.
PART THREE:
Alberta needs strategies to broaden, deepen and attract skilled workers and ignite start-ups with global aspirations
Alberta needs to build and nurture a competitive economic ecosystem to foster growth and innovation. The role of government is to foster that ecosystem and the strongest and most effective lever is a pro-growth tax policy.
Without that we will never be able to capture the critical mass of human ingenuity and venture and follow-on capital
We need desperately to ramp up our efforts to broaden and deepen our base of skilled workers, researchers and innovators who will give us the critical mass needed to bolster our research capacity to develop new technologies and ideas – and turn those into thriving and innovative enterprises.
To do that we need to work with our post-secondary and technical institutions to integrate innovators, subject-matter experts and business management professionals with venture capitalists and ultimately investors. Increased integration between our universities and technical institutions will foster a new “supergraduate” with a more diverse skillset.
This increased capacity will equip our technical experts to see ideas and innovation through to commercialization. One of the key factors in successful commercialization efforts is ensuring there is sufficient business and subject matter expertise to sort out and promote technologically sound projects that are economically viable.
We need this integration and depth along with a focus on global markets. It will be these factors that allow the free market to choose the winners and losers and this must be done on a global scale.
Go global
We need to think and act big. To attract world-class investment, we must develop ventures with global aspirations. Too often we have wasted time and money on pilot projects that lack true prospects of high returns. We should not confuse small, local business with start-ups scalable to the global marketplace – both are valuable but distinct. In Alberta we fully understand the power of the global market that has been and is the backbone of our economic success.
First in agriculture, then in oil and gas, Alberta has already shown its ability to play on the global economic stage. We should not and cannot be afraid of that in the tech sector. We must leverage our success in agriculture and oil and gas to the tech sector.
We must not forget about the power of small business and our local market as generators of growth and job creation. However, we must go global to create the economic prosperity and also address the boom, bust nature of our natural resource sector.
Lessen the risks and costs for the research community
Alberta must do what it can to attract and retain necessary human capital. Alberta should be the hub that offers advantages where world-class innovators and researchers can work, live and succeed in their fields. We can offer this environment through our lifestyle value proposition, competitive retention strategy and inducements that include educational bursaries/scholarships and tax incentives focussed on long-term retention.
Researchers are attracted to where their expected benefits outweigh the expected costs factoring in risk. We must provide favourable personal tax regimes including value for tax dollars (There is a very competitive value proposition in our provision of publicly funded health care for example).
To the extent that we can, we should focus on establishing a cluster model. If a project does not work out for a researcher, there is another, easily identified opportunity for that person nearby (this is why Silicon Valley, San Francisco works as well as it does). Reducing the cost for the innovator to transition from one opportunity to the next is vital for retention in Alberta.
We must support basic research at universities and fund free standing research facilities (support research not specific projects) and understand the role of prestige for our universities as a draw for talent.
Support incubators and accelerators
We need to do a better job supporting incubators and accelerators. The support systems they provide are vital to help start up companies mature quickly and get off the ground in time to meet what is often a very short window for business maturity. This support can come in different ways. We can look at such things as targeted bursaries or grants to qualified post-secondary researchers that will allow them to matchmake with an incubator or accelerator to bring promising innovations to commercialization.
This would serve to have post secondary students and researchers thinking more entrepreneurially earlier on, while guaranteeing a flow through of funding to incubators and accelerators. We can also consider tax incentives for the private sector to be able to second business development staff to advise and mentor during the incubation phase of an innovation. This would be of great benefit during trying economic times for private sector companies who could second staff that they would otherwise be forced to lay off. This would save considerably on exit and re-hiring costs when the economy begins to pick up again.
Market distorting subsidies and the cost of capital
Subsidies add to the cost of capital because they are difficult to optimize and should be avoided for several reasons. Governments are notoriously bad at picking winners and too often grants and subsidies only serve to attract those whose primary expertise is in writing income generating grant applications.
Further we have seen in the past where subsidies have prolonged the lives of old, unsuccessful businesses and at the same time blocked the way for newer, well managed businesses into the marketplace.
We need to promote the expansion and growth of a healthy private venture capital industry in Alberta that has the ability to fund successful early stage technology companies to the next level of development and funding requirements. As recommended by the Canadian Chamber of Commerce, the Alberta government should support efforts to convince the Canadian government to make flow-through shares available to all types of technology companies, not just oil and gas or mining companies and provide exemptions from capital gains from venture capital investments.
Remove limitations of the Alberta Investor Tax Credit Program
The Alberta Investor Tax Credit (AITC) program is supposed to encourage investment in non-traditional sectors with strong job creation potential.
The AITC is applicable across sectors, offering a 30 per cent tax credit to investors who provide capital to Alberta small businesses doing research, development or commercialization of new technology, new products or new processes.
However, as I mentioned in part one of the series, the well intentioned but badly designed program has been bogged down by a bureaucratic cumbersome application and approval process that is scaring investors and start-ups away.
Look west for success
Alberta should not be afraid to borrow good policy ideas from other jurisdictions.
One such example is British Columbia’s Small Business Venture Capital Tax Credit program,
This was established to encourage investors to make early-stage venture capital investments in B.C. small businesses to help them develop, grow and mature.
Unlike Alberta’s Investor Tax Credit program, this one is successful because it is excludes much of the unnecessary bureaucracy, uncertainty and restrictions imposed by the Alberta NDP program.
Decrease regulatory burden
We are being economically starved by the disastrous, cumbersome and often-unnecessary regulatory burden placed on us by the Alberta NDP and federal Liberals. Approval processes are too long and duplicative, driving away not only seed capital but also stifling the necessary follow-on capital. Our prospects for growth are wasting away.
This certainly doesn’t mean we shouldn’t have regulations. In fact, prior to the unnecessary intervention by the Alberta NDP and the federal Liberals, investors were attracted to Alberta as a place with a strong, ethical and responsible regulatory system. However, in an effort to appease activists who said otherwise, the Liberals and NDP capitulated to the vocal minority and paralyzed our regulatory system. We need to bring back clarity to our world-class regulatory environment and have the best,most responsible and balanced approach on the planet. There must be timeliness and a commitment to long-term stability, rather than a failed approach of constantly changing the rules and moving the goal posts.
Regulatory frameworks must be globally and interprovincially competitive. There’s no point in having competitive tax policy while at the same time having a regulatory environment that drives away growth capital and investment.
All existing regulations must be reviewed for effectiveness, impact, economic burden and public interest and must be in line with best practices.
We cannot continue to starve economic growth in this province with a regulatory environment that does not put us in the best competitive position globally.
Regards,
Whitney