In 2013, Premier Christy Clark announced an intention to create the B.C. Prosperity Fund using liquefied-natural-gas revenues. Since then, we’ve heard little about it.
But as budget season comes around again, we might finally get some details. After all, last year’s budget said that the Prosperity Fund wouldn’t move forward until the LNG tax was finalized, and that happened last fall. This makes now a good time to renew the discussion about a sovereign wealth fund in B.C.
Let’s revisit what a sovereign wealth fund is and why resource-dependent regions use them. When it was first announced, the B.C. Prosperity Fund was pitched as a way for B.C. to pay off its debt, reduce taxes and pay for social services. This might lead some people to think that the Prosperity Fund would be a new source of money. That’s not quite right.
The new money would be tax revenue from a new LNG industry, and B.C. could conceivably use it to pay off debts or lower taxes or build hospitals without creating a sovereign wealth fund. So why do it? Sovereign wealth funds are generally created for two main reasons: to stabilize government finances when prices for natural resources rise and fall, and to preserve resource wealth for the future.
What sovereign wealth funds do is transform a non-renewable natural resource into a renewable financial resource. They collect, save and reinvest a portion of government revenue from non-renewable resources in order to generate steady investment income over long periods of time.
As in all commodity markets, there will be limits to how much LNG we can export and how long we can go on exporting it. But money we’ve put aside in a sovereign wealth fund will keep generating income for us through returns on investments even if the LNG market tanks some day.
So the Prosperity Fund wouldn’t create new money for government, but it would help ensure that the flow of money from LNG is stable over time.
However, history has shown us that this trick is not easy to pull off. A new report by Resource Works examines four existing sovereign wealth funds used in other regions, looking at the goals they were designed to achieve, how they are structured and how they have performed.
For example, Norway’s fund has grown to be the world’s biggest through 20 years of disciplined management that has earned them global accolades. In Alberta, on the other hand, decades of underinvestment and overspending have made its fund a common example of what not to do.
So what separates the good from the bad? The report provides a few key lessons.
First, we need to decide what we want to accomplish before we design the fund. Sovereign wealth funds can be used to achieve different goals, and unless we decide which ones to pursue, we are unlikely to be able to design one that works.
And in order to ensure that the fund grows over time, we need strict rules on how much money is put into the fund and how much money the government can take out of the fund. At this stage, we argue that setting the right contribution and spending levels is more important than deciding what the fund’s assets should be spent on.
The final recommendation is to protect the fund from short-term politics. The fund should be managed by a professional body at arm’s length from government. Government should set the fund’s broad objectives and supervise its performance. It should not be involved in making routine investment decisions, and it should not be allowed to change the core contribution and spending rules at a whim.
One of the B.C. government’s responsibilities is to ensure that part of this province’s resource wealth is used to support the public services British Columbians need. The B.C. Prosperity Fund is a tool that can help make this support reliable and long-lasting, extending our resource prosperity to future generations, over good times and bad.
This is how we encourage British Columbians to think of the B.C. Prosperity Fund: not as a golden ticket; not as a licence to print money, cut taxes or build stadiums; not as a get-out-of-debt-free card, but as an important part of our commitment to responsible resource management.
Bud Smith is a former B.C. attorney general and the current chairman of the B.C. Lottery Corp. He is a member of the advisory council of the non-profit Resource Works Society.