ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for a selection of more analysis available only to subscribers.
Most provincial premiers must wish they had the kinds of problems British Columbia's Christy Clark faces. Her government is heading into a tough election campaign this spring, but with a passably restrained proposed budget in hand, a promise to balance the books ahead of most of other provinces and a much lower debt-to-GDP ratio than Ontario and Quebec.
The two biggest challenges facing Ms. Clark? How to tax B.C.'s expected bounty of liquefied natural gas exports in the coming decades, and what to do with that windfall.
But B.C. needs to get this right. Already it has LNG project developers (none of whom have formally approved their plans) bristling at the prospect of paying huge export royalties and taxes to B.C.. Meanwhile, those revenues will boost the province's finances like winning the lottery: proceeds from natural gas currently piped around North America should hit $144-million this year, just 0.3 per cent of B.C.'s total revenues. According to two outside consultants working from government projections, that is expected to rise to between $4-billion and $11-billion annually when the LNG industry is in full swing – equal to as much as 25 per cent of the province's current revenues. Such long-term estimates may be overly rosy, but there's little doubt the business of shipping gas to Asia will transform the B.C. economy.
The natural gas industry is antsy about the mix of taxes and royalties the government is expected to impose – the government expects its take will range from $130-billion to $260-billion over 30 years, based on five plants opening. The industry expressed dismay Tuesday at news the government won't be unveiling its fee scheme for months. Then again, several consortia have announced projects devoid of any such details, so suggesting they've already incorporated best-and-worst-case scenarios into their forecasts, and still find the prospects attractive. Meanwhile, the government won't want to stymie an industry that is the cornerstone of its economic future; the fact that it is using Australia, a major LNG exporter, as its benchmark is a good sign.
Let's assume the taxation/royalty issue reaches a workable conclusion and the projects proceed. What about all that money? Wisely, Ms. Clark's government is planning to set up a "B.C. Prosperity Fund," which would collect a good portion of the revenues and put it to use for the benefit of generations to come.
At least, that is the stated intention from the government's throne speech last week: "Your government is resolute that the Prosperity Fund cannot become a backstop or excuse for poor fiscal management of government." The temptation to abuse this fund, however, will be great. Just look at Alberta, which set up its Heritage Trust Fund in the 1970s to collect a portion of oil and gas revenues and share the wealth with generations of future Albertans. Instead, the government got hooked on petrodollars, stopped diverting money to the fund, and then began raiding it to bolster its finances. Today Alberta's fiscal profile is out of whack (no debt other than recently-announced infrastructure loans, no sales tax and too much reliance on resource revenues for its budget, creating massive shortfalls when prices drop), and its Heritage Fund is measly and underfunded: most of the windfall that was supposed to benefit future Albertans has already been spent.
So what are the B.C. government's plans for the prosperity fund? The government outlined three possible uses: wiping out the debt, eliminating provincial sales tax and enhancing government programs and services. They suggest that the proceeds from this non-renewable resource will be largely spent as they come in. At the dawn of B.C.'s transformative energy boom, it would be a shame if its political leaders had learned nothing from their neighbour to the east.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .
Sean Silcoff