This interview will appear in the 1Q Y2013 (April 2013) issue of the Sovereign Wealth Quarterly.
This is a Q&A with Niels Veldhuis, President, Fraser Institute.
1. Can you give a brief summary on the proposed British Columbian Prosperity Fund? How would it be funded?
The B.C. Prosperity Fund is being created to set aside a portion of government royalty revenues generated from the liquefied natural gas (LNG) industry for the benefit of future generations.
2. What are the chances of the Prosperity Fund being created? If so, is there a timeline?
There is a risk that the upcoming B.C. election may impact the creation of the Prosperity Fund.
3. What are some important lessons this proposed fund could learn from the Alaska Permanent Fund, Alberta’s Heritage Fund, and Norway’s Sovereign Wealth Fund?
Thankfully there are key lessons British Columbia can learn from neighbors, Alaska and Alberta.
First, legislation for the Fund should specify the contribution rates for revenues directly linked to non-renewable resource extraction. Alberta’s Heritage Fund has no to contribution requirements while Alaska has a constitutional requirement to deposit at least 25 per cent of specified non-renewable resource revenues into the fund. (The legislation later increased the contribution rate for revenues from new oil and gas fields to 50 percent.)
Second, legislation for the Fund should also detail how the earnings can be used. Alberta’s Fund provides the government with almost complete discretion on how earnings of the Fund can be used, which explains why since its inception almost all of the earnings have been removed from the Fund and transferred to the government to finance spending. Alaska, on the other hand, specifically requires a sufficient amount of the earnings of the fund to be retained to protect against inflation. In addition, Alaskans benefit directly via dividend payments from the Fund.
4. In your opinion, should the proposed fund be used to pay down provincial debt or be used as a future generations fund for the citizens?
Paying down debt significantly benefits both current and future generations. In addition, from a financial perspective, paying down debt yields a fixed return by eliminating interest costs. If the B.C. Prosperity Fund were to issue dividends payments like Alaska, it should only do so after the Fund has eliminated the province’s substantial debt.
Perhaps the best way to benefit future generations is to use of earnings from the Fund is to permanently reduce economically-damaging taxes (i.e. corporate and personal income taxes).
5. British Columbia has at least five liquefied natural gas projects in various stages, would this proposed law effectively kill future energy development?
While the B.C. Prosperity Fund is a good idea, B.C.’s LNG industry is in the infant stage and the province must ensure that its royalty regime is internationally competitive and minimizes the negative impact royalties have on the cost of investing. In addition, future governments must avoid temptations to increase royalties. On the latter point, Alberta’s massive increases in energy related taxes in 2007 provide a useful lesson for B.C. of what not to do.
6. Anything you would like to add?
If done correctly, the Prosperity Fund could be a huge benefit to both current and future British Columbians. As with many things though, the devil will be in the details.
About Niels Veldhuis
Niels Veldhuis is president of the Fraser Institute, Canada’s most influential think-tank. Mr. Veldhuis has written 6 books and over 50 peer-reviewed studies on a wide range of economic topics. He is in high demand for his opinions and perspectives on major economic and social issues, appearing regularly on radio and television programs across Canada and in the United States. Mr. Veldhuis travels widely across North America, speaking to business groups, corporate gatherings, voluntary organizations, and students. In 2011, Mr. Veldhuis led a discussion between former presidents Bill Clinton and George W. Bush at the Surrey Economic Forum.