October 25, 2000
Free up Hydro with Alaska-Style Heritage Fund
The exit of the state from public ownership of business became a defining theme of public policy as the twentieth century wound down. Since 1986, governments around the world have sold off more than a trillion dollars (U.S.) in state-owned enterprises.
The trend had little to do with ideology and a lot to do with the smarter use of community resources. Frequently, government enterprises required subsidies that papered over various inefficiencies. Divesting them ended these transfers while raising capital to pay down public debt and associated debt service charges. Governments also discovered that business organizations freed from government funding queues could raise capital for expansion and modernization on their own. They ended up growing faster and contributing tax revenues like normal businesses. The technology revolution has exposed critical areas of the economy, like telecommunications and electric power generation, to vigorous competition that has led to the breakdown of long-established monopoly models. Scenarios where elected officials with no business experience operate businesses have no place in this dynamic.
Our own, sometimes hysterical debate, over the privatization of the MTS now seems a distant memory. In hindsight, it was perhaps Gary Filmon's wisest policy move. Led by plummeting long distance charges, prices continue to fall. Freed from the politics of public ownership, MTS is tapping capital markets for $300 million to invest in very high-speed Internet services. This would not be happening if the company were stuck in line with other government organizations at the rim of the financial black hole called Medicare.
In Saskatchewan, Canada's only remaining government phone company, SaskTel, continues to fall in value in a hyper-competitive environment. According to John Messer, a former Saskatchewan NDP cabinet minister and past president of SaskPower, the fixation on government ownership is delaying the inevitable. He believes the failure to privatize has reduced the value of SaskTel by a third to a quarter from its peak, which could be as much as $500 million in community equity. Recognizing reality, one of the province's political parties has suggested putting the question to a referendum.
Another approach to ease the transition from the old model would be to recycle the community capital tied up in these organizations into an endowment fund. Manitoba Hydro and the province's hydro-generating potential might provide up to $10 billion in seed money for our own Heritage Fund, an amount that could generate over a billion dollars annually. How many Manitobans would object to selling Manitoba Hydro if it meant a yearly dividend cheque in the mail?
An added benefit would be the overnight creation of a major corporate taxpayer. Crown jewels look nice in a display cabinet, but they tend to gather a lot of dust. TransAlta, the Calgary-based power company that is roughly the same size, pays corporate taxes that are higher than Manitoba Hydro's entire profit, even after distributing healthy dividends to its shareholders.
The most familiar example of such a venture is the Alberta Heritage Fund, created in 1976 to collect the provincial government's share of profits from the oil patch. But it hasn't worked well because politics have minimized returns. A wiser alternative emerged in the same year. It's called the Alaska Permanent Fund.
A study by two scholars at the University of Alberta's Faculty of Business (available at www.apfc.org) compares the two funds and deems the Canadian one inferior in several respects. Although the money in both cases originates with petroleum, two different philosophies have governed their construction and operation.
Allan Warrack and Russell Keddie conclude that the Heritage Fund took the form of nationalization of assets. It's controlled by the provincial treasurer and his staff. Like the assets of the under-performing Canada Pension Plan, returns were primarily used to expand the role of government. They underwrote general budget expenditures, allowing Alberta to keep taxes low. Most investments landed in Crown corporations or in loans to other provincial governments, most notably Québec's. Capped in 1987 at about $12 billion, the Heritage Fund has since shrunk by about 20%, and its rate of return over 24 years has averaged 9.5%.
In contrast, the Alaska Permanent Fund continues to grow with the ongoing infusion of oil profits. Operated at arm's length from the state government, it must, by law, be run by independent managers who are obliged to follow the "prudent investor rule": seeking the highest return with no consideration of social or political goals. Its value now stands at about US$28 billion, and its rate of return has averaged 12.2%.
The Alaska nest egg differs in another important respect. Ten-and-a half percent of its earnings, averaged over five years, go directly back to citizens. Each Alaskan received a cheque for $1,000 in 1999. The people of the state exercise direct democratic control over the distribution of the fund's earnings. If the state government decides it wants to spend more of the proceeds, it must put the matter to a vote. "In Alberta, the Heritage Fund belonged to the government," the Alberta academics state. "In Alaska, the Permanent Fund belonged to the people."
The idea of setting up a heritage fund by selling Manitoba Hydro -- and other Crown assets, for that matter -- makes a lot of sense. Should that ever happen, though, the success of the venture will depend on how it is constructed. As Warrack and Keddie report, "The Alaskan method involves placing the funds directly into the hands of citizens, who will make their own economic decisions regarding consumption and saving/investing."
In Manitoba, Hydro remains small, offering lower prices because it pays few taxes and a miniscule return on the substantial investment it represents. In Alberta, oil profits have become the plaything of the politicians and civil servants. In Alaska, it's power to the people.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."