Income Trusts and Rainy Day funds

Manley sounds alarm on rush to income trusts

Finance Minister Jim Flaherty is growing increasingly concerned with Corporate Canada's love affair with income trusts, but is unwilling to move against the sector for fears of a political backlash, according to his predecessor, John Manley. Manley is one of a growing number of business leaders who fear Canada's competitive position is threatened by the shift to trusts, highlighted by the conversion plans of leading telecom companies Telus and BCE. Under the tax-efficient trust structure, most of the cash a company generated is handed out to shareholders. “The overriding concern here is does this move to trusts leave Canadian enterprises with the flexibility they need to compete? That's the problem, the lack of flexibility,” Manley said. To date, Flaherty has refrained from commenting on the government's plans for a trust sector that has grown from nothing a decade back to be worth $250-billion once BCE and Telus convert. Flaherty has said Ottawa is keeping an eye on the conversions, and that tax cuts on dividends contained in the last federal budget were meant to level the playing field between corporations and trusts. According to Manley the recent rash of conversions “is driving Flaherty nuts.” But Manley said Flaherty likely doesn't have political support from Prime Minister Stephen Harper to tackle the issue while still in a minority government, with an election always on the horizon.

Fears that business trusts are a wrong structure for the times are echoed throughout the Canadian business community. “These trusts misallocate the capital, the savings of Canadians, and that capital is the primary source of our economic growth,” said Peter Godsoe, the former chairman and ceo at Bank of Nova Scotia. While admitting he owns trusts, Godsoe said: “We are using a structure that the Americans looked at, and shut down. The Australians had trusts, they shut them down. The British looked at this, and decided not to allow it. What do we know that everyone else doesn't?” Godsoe and Manley, along with a great many Bay Street financiers who didn't want to go on the record because they make a living selling trusts, said wholesale adoption of the structure will, over the long-term, inflict damage on Canada's competitiveness. Manley said trusts make sense for real estate and mature oil fields but do not suit businesses such as phone companies. “What happens if you have a huge change in technology?” he asks, referring to the need to invest billions into networks. “Long term, this will cost us.” A trust, he said, implies that shareholders don't trust managers to manage their companies. Yet in the absence of changes in the tax act, more trust conversions seem inevitable, with pipelines and CPR touted as the next potential candidates for the switch.
(Globe and Mail 061023)

There you go again. Income Trusts bring out additional value to be distributed to shareholders, but at what cost? Nothing matters anymore but quarterly results. No one believes in civic responsibility whatsoever anymore. It's pathetic.

Can Alberta learn from Norway?

Friday's inflation data highlighted a problem that has engulfed Canada for the past year: Prices rose at a 0.7% pace on a national level, but in Alberta, where the global commodities boom has set the provincial economy on fire, inflation was up 3.7%. The disparity holds true for almost every economic statistic, as Alberta's fortunes surge while Central Canada and the East plod along listlessly, ground down by high energy prices, a strong dollar and now, a US slump. And since monetary policy looks to national levels of inflation, and doesn't take into account that Alberta's economy distorts national figures, interest rates have risen over the past year, mainly to quell the Alberta inflation fire. Now, there's a partial solution blowing in the wind - all the way from Norway. A consensus is forming among economic and political leaders that Alberta could learn from a successful and time-tested Norwegian fiscal policy of setting aside all its oil and gas revenue and investing it outside the country.

Norway has set up a special fund to stabilize the economy today and make sure oil revenue works for the country's future. Norway puts all of its oil and gas revenue, plus earnings from its state oil and gas interests, into the fund every year. All of the fund is invested outside the country in stocks and bonds, and interest earned in the fund is reinvested. Only 4% is made available for government spending. Norway's Petroleum Fund, worth more than US$250-billion, serves a dual purpose. By investing all government earnings from non-renewal natural resources, the government ensures an income flow for the country even after the earnings abate. And by removing the windfall from the country's books and economy, the fund imposes an immediate and strict fiscal discipline on budget makers and removes much of the inflation-fuelling heat that would result from the spending of such revenue. The result: Growth is strong and steady, not boom-and-bust, like a typical oil power. Inflation is very low, unlike in Alberta, and Norway's exchange rate does not rise and fall in tandem with oil prices, like Canada's. The fund is so huge that it could cover all of government spending for two years.

In theory, at least, Canada could use some results like that. Alberta's inflation rate has soared in recent months and has been well above the national average for more than a year. Inflation in most of the rest of the country is well under wraps, and is forecast to average only 0.9% in Ontario next year. The loonie has soared on Alberta's oil riches, driving down profits and cutting into employment in the manufacturing in Central Canada. And the country's economy has become so dependent on the spinoffs from oil and gas that many analysts wonder how it will cope when the prices inevitably fall. So now, leading Alberta politicians and think tanks are proposing Norway-style hybrids for the province. Several of the candidates to replace Ralph Klein as head of the Progressive Conservative Party support a savings plan of some kind. The perceived front runner, Jim Dinning, has been pushing the idea for years, and a proposal to legislate at least 30% of annual oil and gas revenue to the Alberta Heritage Savings Trust Fund is a central plank in his campaign.
(Globe and Mail 061021,061023)

Doesn't this sound really, really smart? Like controlling your growth to reap benefits in the future? This concept is way over the heads of the yokels in power in Edmonton, which would rather have everything go full bore until the entire system runs out of steam and crashes and burns. Remember economic cycles, anyone? Oh right -- in the good times, the unalterable laws of economics get thrown out the window because they don't apply anymore, right?