7Finance Minister (2010)

Budget 2010

Stelmach’s new cabinet—with me as minister of finance and enterprise—was announced on January 12, 2010. As mentioned, the 2010 budget had already been sent to the printers, so I knew that I would soon be introducing the largest projected deficit—$4.7 billion—in Alberta’s history.¹ What a legacy! On February 10, I did just that.² Publicly, I tried to make the best of what I privately thought was a bad deal.

My budget speech—”Striking the Right Balance”—employed all the usual clichés that politicians use to deliver the message of short-term pain for long-term gain. Running a deficit in the middle of the worst global recession since the late 1980s did not make us any different than any other province or the federal government. What did make us different, I emphasized, was that our new debt was paying for long-term capital infrastructure, not day-to-day operations. And I repeated the premier’s promise that we would be back to a balanced budget by 2012.

Politically, the budget is a big event in Alberta, and quite a few of my friends came to Edmonton see me deliver the annual budget speech. There was a public reception following my speech. We then held a private party afterward, at which Sam and Kristine Armstrong presented me with a four-foot-long authentic samurai sword. The unspoken message was clear: It was time to start cutting spending.

I spent the next eleven months trying to do just that, with the samurai sword on my desk. My goal was to develop a budget for 2011 that would serve as a stepping stone to a balanced budget in 2012—just in time for the next scheduled election. This was a very public commitment Stelmach had made, and one I was determined to deliver. Unfortunately, it did not turn out that way. The how and why of this is recounted in the next chapter, “How I Unbecame Finance Minister.”

In this chapter, I recount the other major issues that occupied my year as finance minister: successfully blocking the federal government’s attempts to replace the Alberta Securities Regulator and to expand the Canada Pension Plan, but failing to stop the most expensive fiscal mistake in Alberta history—the North West Upgrader. Looking back, it is ironic that I achieved more policy success outside of the PC cabinet than inside.

The Minister’s Cave

One of the surprising consequences of becoming a minister of the Crown is that you suddenly spend very little time with your fellow MLAs, and much more time with your senior civil servants and the stakeholders whose interests are directly affected by your new ministry. The only MLAs you regularly interact with are the other ministers. And if you’re the finance minister, this means them asking you for budget increases for their departments and you telling them, “No way.”

The explanation for a new minister’s schedule is simple. The first several months are spent getting up to speed on all the policy files and priority issues that he or she is now responsible for. As minister, you are now the boss. But typically, you know very little about your new business. This irony is compounded by the fact that your instructor in this process is your deputy minister. In theory, of course, he works for you. But in practice, knowledge is power. (There is an inside joke amongst senior bureaucrats: that the ministers they work for are just “renters,” i.e. , they come and they go.) This means countless hours in briefing meetings with your new deputy minister and his senior executives. In my first two months at Finance, 80 percent of my time was spent with my new administrative team. It also gave me a new appreciation for accountants!

As for the stakeholders, they all want face time with the new minister as soon as possible. They have been working with and sharing what they consider to be important policy information with the relevant civil servants in your department for years. Now they want to tell it to you face to face. And you had better give them some time. If they become unhappy with you, they are quick to go either to the premier’s office or to the media to tell them what a poor job you are doing.

One of these meetings I initiated myself. I requested a meeting with Jim Dinning. As Ralph Klein’s new finance minister in 1993, Dinning had been given a similar assignment—to slay the GOA’s deficit and debt dragon. I thought that I could learn from Dinning’s experience. But I was not sure if he would agree to meet with me, as our relationship had become quite adversarial by the end of the 2006 PC leadership race. To Jim’s credit, he did meet with me, and his advice was helpful: When asking ministers to cut their budgets, don’t accept NO for an answer. I left our breakfast meeting with a new appreciation for Jim Dinning.

Some of the stakeholders I met with that year were members of an informal advisory committee that had been assembled by Jack Mintz. In 2008, Jack had left the C.D. Howe Institute in Toronto and had moved to Alberta to form the new School of Public Policy at the University of Calgary. With Jack now in Alberta and me as the new Alberta finance minister, our communications became frequent.

This advisory committee included some of the most influential business leaders in Alberta.⁴ Some I knew already through PC Party politics and my own 2006 leadership fundraising efforts. It would be difficult to create a list of more successful Alberta CEOs. Its composition was heavily weighted toward Calgary and the oil and gas sector. But that was fine with me. That’s what had powered Alberta’s post-Leduc economic boom for the past five decades. Without oil and gas, “Cowgary” would still have looked like a poorer version of Regina.

I met individually with most of these individuals over the course of 2010. Unfortunately, the first time we assembled as group—December 7, for a dinner in Calgary—was also the last. (To understand why, you will have to read the next chapter.)

Fighting the Feds I: Securities Regulator

One of the first files my new deputy minister, Tim Wiles, put on my desk dealt with the federal government’s recently announced plan to create a new national securities regulator. Historically, securities regulation has always been deemed to fall under provincial jurisdiction. Each province has had its own securities regulator. Over time, the provinces have worked together to create a “Passport System” that harmonizes rules and standards and provides for “mutual recognition” of each other’s decisions. The plan being proposed by Ottawa would replace all of these provincial regulators with a single, new national securities regulator located where else but in Toronto. The rationale for this change was that the Passport System was an inefficient and outdated “patchwork” of ten different systems and that to stay competitive, Canada needed a single national regulator, like the Securities and Exchange Commission (SEC) in the US.

Predictably, Quebec immediately opposed this transfer of power to Ottawa, and had already announced that it would challenge its constitutional validity in court. A month before my appointment, my predecessor at Finance, Iris Evans, had announced that Alberta also opposed the plan and would intervene to support Quebec’s legal challenge. Now the file was mine to manage.

The issue was a perfect fit for me. I had been writing and campaigning against federal overreach for years. In addition, just a few years earlier, I had published a study on how both levels of government use strategic litigation to protect or expand their existing policy jurisdictions. My lead example was how former Alberta Premier Peter Lougheed had used Alberta’s reference power to successfully challenge a new federal tax on exported natural gas, one component of Pierre Trudeau’s hated Nation Energy Program (NEP).⁵ Here was my opportunity to do the same.

In February, I announced that the Alberta government would use our reference power to challenge the constitutional legality of the federal plan.⁶ I contacted Quebec Minister of Finance and Revenue Raymond Bachand and asked him to intervene to support our challenge. Not only did he agree, but we soon worked out plans for him to visit Alberta and for me to go to Quebec. We believed these visits would generate public awareness that we were working together to protect our respective provinces. I subsequently hosted Bachand at lunchtime Chamber of Commerce meetings in Calgary and Edmonton on September 13 and 14.

We then sent a co-signed letter to other provincial finance ministers urging them not to feel compelled to sign on by September 30, as requested by federal Minister of Finance Jim Flaherty. We pointed out that that no courts had yet even heard evidence as to the constitutionality of the federal proposal. In a joint press release, we declared:

The deadline imposed by Ottawa is completely arbitrary and is just an attempt to put pressure on provinces and push its agenda forward in the face of mounting opposition. … There are other provinces, besides Alberta and Quebec, that do not support the federal proposal and others that have not taken a position, and I would urge these provinces not to feel pressured into signing something that will be taken by Ottawa as a sign of support.⁷

To the best of my knowledge, this was the first and last time that a minister in the Alberta government issued a press release whose header included the official symbols of both the Alberta and Quebec governments. As I explain below, I hope it will not be the last.

I also worked closely with Bill Rice, at that time the president and CEO of the Alberta Securities Commission. Bill and his board strongly opposed the federal initiative, as did almost all of the junior oil and gas companies in Western Canada. Our argument was simple: “What works on Bay Street doesn’t work in Montreal, and doesn’t work out in Vancouver or Calgary. … Our success has been in raising capital to reflect regional needs and regional economies.”⁸

Canada’s Passport System was already recognized as among the best in the world. The OECD and the World Bank Group had rated it ahead of both the United States and the United Kingdom—both of whom have a single, national regulator. And for two years in a row, the Milken Institute had ranked Canada first in terms of having the “best access to capital.”⁹ Our message was simple: If it ain’t broke, don’t fix it.

For Alberta, the Passport System also contributed to economic diversification. Since the 1960s, Calgary has become the financial services hub for Canada’s energy sector. The job-multiplying effect of having a province-based securities commission was well documented in both Alberta and Quebec. As I wrote in the Calgary Herald, “If we let the Alberta Securities Commission get scooped up and transferred to Toronto we can also say goodbye to thousands of spinoff jobs in investment, banking, law, accounting and financial analysts.”¹⁰

We had reliable evidence that the Passport System already accomplished everything that the proposed single national regulator claimed it would, plus additional advantages for each province. Our arguments were supported by Jeffrey MacIntosh, the Toronto Stock Exchange Chair in Capital Markets at the Faculty of Law, University of Toronto;¹¹ and also by Thomas Courchene, one of Canada’s best-known economists, who has held senior public policy positions at both Queen’s University and the Institute for Research on Public Policy in Montreal.¹²

Legally, we had a century of constitutional precedent on our side. Securities regulation had always been deemed to fall under the provinces’ section 92(13) jurisdiction over “property and civil rights.” Allowing the proposed new federal plan to proceed would also set a dangerous new precedent with repercussions far beyond the regulation of securities. Neither Alberta nor Quebec was going to let this happen without a battle.

The good news: We won. Both the Alberta¹³ and Quebec¹⁴ courts of appeal ruled that the proposed new federal regulator was an unconstitutional invasion of provincial jurisdiction. Ottawa, of course, appealed its losses. But the Supreme Court of Canada affirmed the lower courts’ rulings.¹⁵ In a unanimous decision, the Supreme Court stated:¹⁶

It is a fundamental principle of federalism that both federal and provincial powers must be respected, and one power may not be used in a manner that effectively eviscerates another. … Accepting Canada’s interpretation of the general trade and commerce power would disrupt rather than maintain that balance. Parliament cannot regulate the whole of the securities system simply because aspects of it have a national dimension. 

So if all three courts found that the federal plan was clearly unconstitutional, why did Ottawa even proceed with this initiative? The answer, of course, is politics. The federal minister of finance was the late Jim Flaherty. Flaherty was from Toronto, and a Bay Street veteran. Home of the Toronto Stock Exchange (TSX), Bay Street had always wanted a single national regulator, but only if it were located in Toronto. Indeed, the Ontario finance minister at the time, Dwight Duncan, had said more than once that if the head office were not in Toronto, then Ontario was not interested. So all the other policy arguments notwithstanding, what Flaherty was doing was bringing home the bacon to his constituents.

This points to the key takeaway from this episode. It is another example of Alberta’s vulnerability to the political calculus that shapes decision making in Ottawa. Remember who the prime minister was during this entire affair: Stephen Harper. That this could happen in a Stephen Harper Conservative majority government shows that when push comes to shove in Ottawa—when money and votes are on the table—Alberta gets marginalized. And it doesn’t much matter which political party is in power federally. It’s the electoral math. Since 1968, the Liberals have never needed any of Alberta’s thirty-four seats to form majority governments. The two Conservative governments—Mulroney (1984–1993) and Harper (2006–2015)—simply took Western seats for granted. No party takes Ontario and its 121 seats for granted.

A second important takeaway is the value and importance of having Quebec as an ally when Alberta goes to the Supreme Court. I doubt that Alberta would have prevailed in this case without Quebec’s support as an intervenor. The Supreme Court explains its decisions in terms of legal arguments. But judges’ choices of which legal arguments to use are shaped by the broader political context and considerations.

When it comes to decisions involving the federal division of powers—as it did in this case—Supreme Court judges are careful not to make rulings that could ignite separatist sentiment in Quebec. Prior to the court’s ruling, an op-ed in the Globe and Mail warned that if the Supreme Court were to support the federal government’s new plan, “the storm that is already brewing in Quebec could turn into a Category 5 hurricane.”¹⁷

While Alberta and Quebec are on the opposite sides of the arguments about equalization and fiscal transfers, Quebec has been a reliable ally of Alberta in federalism disputes with Ottawa. In the 1980s, Alberta Premier Peter Lougheed worked closely with Quebec Premier René Lévesque—the leader of the Quebec separatist party—to protect provincial autonomy from the centralizing thrust of Pierre Trudeau’s Constitution Act, 1982. Together, Lougheed and Lévesque successfully demanded the addition of section 92A to Canada’s constitution—affirming “exclusive” provincial jurisdiction over the exploration, development, conservation, and management of natural resources and hydroelectricity.

More recently, Quebec intervened to support Alberta’s constitutional challenges to the Liberals’ new carbon tax¹⁸ (2021) and Bill C-69—the Impact Assessment Act (2023), or as its critics call it, the “no more pipelines ever” act.¹⁹ Quebec Premier François Legault has stated that “it should be up to the provinces to decide” how to manage their carbon emissions. “We have often seen the federal government step on the jurisdictions of the provinces. We must be prudent in health, in education … we must jealously guard the powers of the provinces.”²⁰

This attitude makes Quebec a reliable ally for Alberta in the politics of Canadian federalism. Governments often use the reference power to go to the courts to protect or to expand their jurisdiction. The constitution does not speak for itself. In the end, it means what the judges say it means. So governments can and do attempt to amend constitutional rules through litigation and judicial interpretation rather than through the formal amending process. In political science, this is called “strategic litigation.” Lougheed used it successfully to challenge Ottawa’s natural gas export tax in the 1980s. And we used it successfully to block Ottawa’s attempt to impose a new national securities regulator in 2010–11. Going forward, Alberta governments should remember that their chance of success in such cases is enhanced if they have Quebec as an ally.

Fighting the Feds II: Pension Reform

By January 28, I had been moved into my new, much larger office on the third floor of the Alberta Legislature Building, and was meeting with my new deputy minister, Tim Wiles, and his executive team. The stack of policy briefing papers they left on my desk was more than a foot high. But the file that immediately caught my attention was the federal government’s new initiative to address perceived shortcomings in Canadians’ savings for retirement.

One of the options being floated was to expand the Canada Pension Plan. A central plank of my 2006 leadership campaign was for Alberta to withdraw from the CPP and to create our own Alberta Pension Plan (APP), like Quebec. The reasoning was simple. As a consequence of Albertans’ younger average ages and higher rates of workforce participation, we pay into CPP much more than we receive back. A recent study found that between 2009 and 2018, the net annual difference was $2.941 billion each year.²¹ That’s right: $2.9 billion each year. A 2023 study commissioned by the UCP governments of Kenney and Smith found that Albertans’ total net contributions to the CPP account for $334 billion, or 53 percent of all CPP assets.²²

With an APP, this money would stay in Alberta, and could be used to reduce premium payments for both employers and employees; increase retirement benefits; or some combination of both. The last thing that I wanted to do as Alberta’s new finance minister was increase the net fiscal drain to Ottawa.

The federal initiative was driven by a new concern over the adequacy of Canadians’ savings for retirement. Canada compared well with the US and European democracies when it came to income security in retirement. But the 2008–9 stock market crash had erased a lot of savings, both in pensions and private savings such as RRSPs. Ottawa had struck a task force to study this issue and to report back to all federal and provincial finance ministers at their semi-annual meetings. In 2010, the first of these was scheduled for PEI in June and the second in Kananaskis, Alberta, in December. Fortunately for me—and for Albertans—the federal task force was chaired by Dr. Jack Mintz.

Mintz’s studies found that when it came to savings for retirement, the most vulnerable were Canadians who worked in the private sector, especially those in smaller companies; and the self-employed. Nearly three-quarters of private sector workers had no employer pension plans. The least at risk were government employees, who enjoyed secure pension plans, plus their RRSPS and other savings. Also at risk were younger workers—those in their twenties and thirties—who were not saving as much as they needed for retirement.

More specifically, those most at risk were those earning between $40,000 to $100,00 annually. Those earning over $100,000 did not need any help. Those earning less than $40,000 were helped by top-up programs like Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). This suggested that an efficient response would be to target this middle-income group and leave the others alone.

What were the possible solutions? The simplest was just to expand the scope of the CPP. It covers everyone who works and is mandatory. It would require higher premiums for employers and employees, and/or raising the ceiling of annual income that is subject to mandatory CPP contributions. This option was supported by the Canadian Labour Congress, the Canadian Association of Retired Persons, and the Federal Superannuates National Association.

The CPP option was opposed by several other stakeholder groups for a variety of reasons. The Canadian Federation of Independent Businesses (CFIB) argued that given the fragility of Canada’s economic recovery from the 2008–9 recession, now was not the time to impose what would in effect be a mandatory payroll tax on all businesses.²³ The CPP option would mean higher costs for employers, which would deter new investment and consequently slow Canada’s economic recovery. The CFIB recommended policy changes that would incentivize increased private savings outside the CPP. The C.D. Howe Institute opposed the CCP option for the same reasons. It recommended changing the RRSP rules to bring them up to levels already enjoyed by civil servants and politicians. This could be done by increasing the contribution limits from 18 percent to 34 percent of earned income and increasing the maximum annual contribution from $22,000 to $34,000.

Privately, Mintz had told me that the real battle was between pension funds and insurance companies. The former don’t have to pay either GST or income taxes, while the latter do. Expanding the CPP would see the private sector taxables further squeezed by the mostly public sector non-taxables—thereby increasing the latter’s influence over private sector corporate decision making.

Last but not least, Alberta’s senior Finance officials had been working with their counterparts in BC and Saskatchewan on an alternative plan: a joint, voluntary, private sector defined-contribution plan—one that would supplement the CPP, not replace it. It would not be mandatory and there would be no government liabilities.

As I tried to absorb all of this, I was leaning toward a private sector, voluntary solution—one that was more targeted to help those most at risk. The CPP option seemed like another example of federal overreach. But I was looking forward to a vigorous discussion of all options with my federal and provincial counterparts.

This all came to a crashing end two days before I was scheduled to depart for PEI. With no notice to the rest of us, federal Minister of Finance Jim Flaherty and Ontario Minister of Finance Dwight Duncan released public letters endorsing the CPP option. This caught me totally by surprise. In my January briefings, I’d been told that neither Ottawa nor Ontario was interested in the CPP option. I was also angry. The whole purpose of going to Charlottetown was to discuss the pros and cons of each option, not to rubber stamp something that Ottawa and Toronto had already decided.

I called a press conference and declared that Alberta would oppose any moves to increase the scope and size of the CPP.²⁴ I also noted that “it would have been much more helpful to receive [the public letters] several weeks ago rather than 48 hours before we begin to discuss these options.” And just to make my unhappiness clear, I noted that I did not think it was a coincidence that both letters came out at the same time.²⁵

So off I went to PEI, hoping for the best but fearing the worst. In the end, it was neither. No final decisions were made. We were hopelessly divided. I made it clear that while Alberta supported reforms to increase retirement savings, we would not support the CPP option. I repeated the arguments that a more targeted response was needed. My only firm allies were Saskatchewan and Quebec. But there was not much enthusiasm for the new Ottawa-Ontario proposal, and no consensus on what a better alternative might be.

To my surprise, Flaherty seemed open to alternatives. At one point, he actually said that he was “open to deferring the CPP option to two or three years down the road.” I began to wonder if he had been so busy with other responsibilities that the entire federal proposal had been written by his bureaucrats with little to no input from him. Maybe he could be persuaded to change his mind? I decided that over the next six months, before we would meet again in Kananaskis, I would try to do just that.

Unfortunately, I found that I could not give the retirement income issue the time it deserved. It was now being crowded out of my agenda by other, more pressing business. The budget process for 2011 began in earnest after July, and as recounted in the next chapter, for me it was all consuming. I was also trying to stop Stelmach from signing off on the North West Upgrader project, and to stop Mel Knight from approving the Micrex mine project in the Crowsnest Pass area (see chapter 5). I failed in the former but succeeded in the latter. All of this left little time to rally support for an alternative to the CPP enhancement option.

However, thanks to my deputy minister and his staff, we did maintain communications with both Ottawa and our provincial allies—Saskatchewan and Quebec. We basically fleshed out the arguments we had made at the meeting in PEI:

• Canada’s retirement income system is not broken.
• The majority of Canadians are well served by the policy status quo.
• There are definable demographics who need help.
• The scope of the solution must be tailored to match the scope of the problem.
• Expanding CPP would be overkill.
• A CPP increase would increase business costs, deter new investments, and slow Canada’s economic recovery.
• In the current economy, job creation is more important than retirement income.
• It’s not just a demographics issue but also an issue of intergenerational fairness.
• The CPP is unfair to younger Canadian workers, whose premiums are now being used to pay for their parents’ generation’s retirement.
• Younger Canadian workers should be given the freedom and responsibility for how best to plan their savings strategies.
• Many if not most would prefer home ownership to the CPP.
• There are several voluntary, private sector savings options that could meet this need.

Would this be enough to persuade Minister Flaherty to abandon the CPP option? On my drive out to Kananaskis, I had my fingers crossed.

The FPT finance ministers meeting was held as scheduled in Kananaskis on December 19–20. But that was the only “normal” thing about this meeting. Flaherty reversed course and announced that he now favoured Alberta’s position of allowing private sector alternatives rather than increasing CPP premiums. Canada’s economic recovery was still too weak, he explained, to force employers and employees to make higher CPP payments. Instead, Flaherty announced a framework for new “Pooled Registered Pension Plans” (PRPPs).²⁶

The proposed PRPPs, Flaherty explained, would “make well-regulated, low-cost, private-sector pension plans accessible to millions of Canadians who have up to now not had access to such plans.”²⁷ It would be voluntary for both employers and employees, and it would benefit those whom the current system underserved—small businesses, their employees, and the self-employed. This narrower focus was especially beneficial for Alberta’s economy, given our disproportionately high number of smaller, private companies.

In addition to its policy merits, Flaherty explained that his decision to go forward with the PRPPs was because “not all provinces were on board” for CPP increases. This was a bit ironic, since the finance ministers from at least six provinces—BC, Nova Scotia, PEI, New Brunswick, and Ontario—preferred the CPP option. They later issued a joint statement asking Flaherty to still consider adopting the CPP expansion later as the economy improved.²⁸ Initially, Alberta and Saskatchewan had been the only provinces to oppose the expanded CPP option, but Quebec had joined us shortly after the June meeting in PEI.

Why did Flaherty change his mind? Was it the result of our six months of low-key, back-channel lobbying? Had one of my friends in Harper’s PMO intervened on behalf of Alberta? Or did we win because now Quebec was asking for the same thing? Or both? I don’t know the answer. But I do know that having Quebec on board helped; and it demonstrates again how strategically valuable it is for Alberta to have Quebec as an ally when we are challenging federal policies that have an adverse impact on Albertans.

The decision to go with the PRPPs and not an increase in the CPP was praised by the Canadian Taxpayers Federation (CTF) and the Canadian Federation of Independent Businesses (CFIB) but criticized by organized labour. “My big fear is that reform delayed may become reform denied,” said Gil McGowan, president of the Alberta Federation of Labour.²⁹ If the CTF and CFIB liked it and Gil McGowan didn’t, then I knew we’d made the right decision.

But the victory was bittersweet. By December 18, I had already made the decision to resign as finance minister the following month. What would happen after that was anyone’s guess—and the subject of the next chapter.

Fighting the Premier’s Office: North West Upgrader

The third and in many ways most consequential policy issue I dealt with in 2010 was the proposed North West Upgrader.³⁰ In government policy, as in life, the path to hell is often paved with good intentions. And so it was with Alberta’s bitumen-royalty-in-kind (BRIK) program. What had started off as a low-cost, low-risk initiative to incentivize more upgrading of bitumen in Alberta had evolved into a multi-billion dollar plan to construct a new upgrader outside of Edmonton, with the Government of Alberta—and by extension, Alberta taxpayers—holding the bag if it failed.

It began innocently enough in the first year of the Stelmach government. Oil prices were soaring to unimagined highs, and billions of dollars were going into new oil sands production. Most of these investments were to build new in situ steam-assisted gravity drainage (SAGD) operations that could access oil sands that are too deep to surface mine. Unlike in the original mining operations, the new, smaller, less capital-intensive SAGD producers were not building their own upgraders.³¹ But unless new upgraders were built, the growing volumes of bitumen production would all be shipped to the US to be refined, with Alberta losing all the value-added benefits.

When Ed Stelmach became premier in 2006, almost 70 percent of the bitumen mined in Alberta was upgraded in Alberta. It was projected that this figure would drop to less than 50 percent by 2017.³² But no one was going to invest billions of dollars in a stand-alone “merchant” upgrader in Alberta unless they had an ironclad guarantee of at least a thirty-year supply of bitumen—the estimated time required to pay off construction expenses and make a profit. Enter BRIK. Its proponents even had a catchy marketing slogan: “Refine it where you mine it!”

As first proposed under the 2007 New Royalty Framework, BRIK would require bitumen producers to give the Alberta government a portion of their actual bitumen production in lieu of paying the required royalties. Armed with its own stream of bitumen production, the GOA could in turn sign contracts with prospective merchant upgraders to guarantee them the long-term supply needed to attract investors. While integrated producers—those who had already built their own upgraders—didn’t like this policy, it was popular with smaller, newer in situ companies. While novel, BRIK was not unprecedented. Earlier Alberta governments had done something similar with conventional oil and gas.

Under this original scenario, the risks to the GOA would be minimal, since it was merely acting as a middleman—collecting bitumen from existing producers and selling it for the same market price to new upgraders. All the risks of building, operating, and then selling the upgraded bitumen would be with the upgraders. The benefits of a more integrated value-added chain within Alberta would include the jobs created during the construction phase and new corporate tax revenues. As public policy, it was low risk, low cost, almost elegant. Build it—or in this case, supply it—and they will come.

At the outset, BRIK appeared poised to achieve all these objectives. Prior to the 2008 recession, five upgraders were being built or expanded and another six were being planned.³³ In all, the projects represented over $100 billion in capital investment and would have added three million barrels a day (mbd) of upgrading capacity—more than tripling the current capacity. The area east of Edmonton began to be called “Upgrader Alley” in anticipation of a Houston-like “Refinery Row.”

Edmonton’s euphoria was short-lived. When the 2008 financial collapse hit, oil prices plunged from $140 in July to $40 by Christmas. Investment collapsed. Only three of the five upgraders under construction in 2008 were completed, and five others were either cancelled or postponed. It became apparent that BRIK by itself was not going to build any new upgraders.

From 2007 to 2009, as minister of sustainable resources development, I had been a supporter of the early version of the BRIK program. But I was not directly involved and was only vaguely aware of the post-2008 changes. This changed when I was moved to minister of finance—and was tasked with reining in our ballooning deficits. Now I was very much involved. And the more I learned about the new deal, the more I opposed it.

Eager to keep one of the premier’s signature commitments, the Stelmach government proceeded to sweeten the deal to keep the one remaining project afloat—the North West Upgrader (NWU) in Sturgeon County.³⁴ Under the original scenario, the government would simply ensure ongoing bitumen supply, and leave it to North West to take their upgraded products to market at whatever prices they could get minus whatever costs they incurred to build and operate.

Under Stelmach’s new deal, the GOA committed to retain ownership of the bitumen up to the point of sale of the upgraded products; pay North West a processing fee or “toll” for upgrading it; and then sell the upgraded products into the market. By now—2010—construction costs were estimated to be $5.7 billion (up from an earlier estimate of $4 billion). Eighty percent of the capital costs would be borrowed, with payment on these bonds effectively guaranteed by the GOA’s thirty-year “take or pay” tolling contract. This new arrangement effectively transferred the risk of upgrading to the government—a liability estimated to cost $19 billion in tolls over the thirty-year contract.

This is the deal that I inherited when I became finance minister. I was immediately assigned to the cabinet NWU “working group.”³⁵ During my January policy briefings, my deputy minister flagged the NWU file as a priority. It soon became clear that Energy officials were much more enthusiastic about this project than Finance. My officials’ concerns were that for the GOA, the risks far outweighed the rewards. The more I learned, the more I agreed.

My concerns were amplified by correspondence I had not previously seen, but that was now privy to me as the minister of finance. One industry player had written a letter indicating that while his company was interested in participating in the “new” BRIK, their own forecasts for bitumen upgrading in Alberta indicated poor returns and financial risks that were greater than the potential benefits. The only reason they were prepared to proceed, he emphasized, was that the new request for proposals shifted all those risks to the GOA.

Another letter from a leading corporate bond rating agency confirmed that under the “hell-or-high water” monthly tariff arrangement, investors were assured of recovering all costs—both construction and operations—plus a fixed return. All these costs would be included in the “cost of service” tariffs paid by the GOA (75 percent) and energy company CNRL (Canadian Natural Resources Ltd.) (25 percent). Nor would bondholders be exposed to any volume risks. Under the new proposal, the GOA (75 percent) and CNRL (25 percent) had a legal obligation to guarantee the stipulated monthly supply of bitumen to be processed.

This risk shifting was needed in order to achieve a high enough rating on the billions of dollars of bonds that NWU would have to sell to build the upgrader. The higher the bond rating, the lower the interest paid on the bonds, and thus the lower the cost of building the upgrader. Shifting all the risk—and thereby reducing the costs of borrowing—was only way the NWU could ever be profitable.

I also consulted with former energy and finance minister Greg Melchin. Melchin’s advice was blunt: “No amount of government subsidy is going to make an unprofitable business profitable. It is only going to transfer the loss to the taxpayer.” He also pointed out that if we did the deal with NWU, it would guarantee that no one else would build a privately financed upgrader in Alberta. The precedent of government subsidy would be set. As a less risky alternative, Melchin suggested a royalty rebate on bitumen upgraded in Alberta, possibly accompanied by a hike in the royalty rate. When I suggested this to the cabinet working group, it was immediately rejected.

I was particularly concerned with the “hell-or-high water” conditions around the proposed processing contract. I contended that it was reckless for the government to sign a contract that committed us to pay the monthly tolls even if the upgrader were not operating. To my way of thinking, this amounted to a de facto government guarantee of the debt bonds North West would need to sell to build the upgrader. I argued that this violated Alberta’s 1996 Business Financial Assistance Limitations Statutes Amendment Act, which prohibits such government guarantees.

Energy officials insisted that the contract was not technically a “loan guarantee,” and they were supported by officials brought in from Justice who told the cabinet working group that “section 72 is clear in that it does not prohibit” such contracts. My response was that this interpretation was self-serving, and that it was not the same as saying that the Act “authorizes or permits” such contracts. I lost.

At a subsequent meeting, our discussion went to the issue of making the tolling payments conditional on the upgrader’s performance. Present at the meeting was a representative from Moody’s, who was there to advise us on finances. He was quick to tell us that to sell the bonds at an interest rate low enough to allow North West to be profitable, there would have to be a “direct, irrevocable and unconditional guarantee of the Crown.” This directly contradicted what our own justice department lawyers had told us. I felt vindicated. But I was hopelessly outnumbered, and I lost again.

Not only was the North West Upgrader one of the premier’s priorities, but it was also championed by newly appointed Deputy Premier Doug Horner. This was hardly surprising. The proposed upgrader was to be built in Horner’s constituency of Sturgeon County. The project was also buoyed by the same pro-Edmonton, anti-Calgary sentiment that had helped Stelmach defeat Jim Dinning and me in the second round of the 2006 PC leadership race and that subsequently led to Stelmach’s ill-fated royalty review.

In the end, all the crucial decisions were made by our cabinet working group and the relevant senior bureaucrats, all coordinated through the premier’s office. Prior to our final meeting before the plan was to go to cabinet and caucus, I had persuaded two of the ministers to join me and vote against it. The day of the meeting, one did not even show up. When I asked why the next day, the response was blunt: “I can count. The fix was in.” When it came time to vote, my one other erstwhile ally voted to support the deal. I didn’t bother to ask why.

The North West Upgrader saga clearly affirms what Canadian political scientists have been saying about cabinet government for quite a long time: “The reality of Cabinet government is that the truly crucial decisions are made by a small handful of ministers, advised by an equally small number of senior civil servants.”³⁶ The earlier successes I had enjoyed at SRD in developing new policies were made possible by the indifference of the premier’s office.

An interesting sidebar to this in-house decision-making process is that over that summer I was approached in a social setting by a senior executive from NWU who pressed me on my opposition to their project. It is interesting because, of course, these were cabinet deliberations that were supposed to be confidential. Who had he been talking with?

A short but polite conversation ensued. I remarked that no private company would take on this type of risk, so why should the government? My interlocutor acknowledged that over time there would be some good years and some bad years, but only the government has the ability to commit for thirty years. Sensing my lack of enthusiasm, he pointed out that the government’s risk is really only an “opportunity cost,” since it receives the bitumen in kind (in lieu of actual royalties). This means that there is no public record of profit or loss. I replied that I doubted that energy analysts in Calgary would be fooled by the lack of public records. Even I could figure out the dollar value of the bitumen we would take in-kind, and then compare that to the price we would get later when we sold the upgraded bitumen.

His final foray was that the upgrader would be a hedge against future low prices for bitumen. This continues to be a favourite “fall-back” position for upgrading supporters. I replied that we already would have that hedge even if the amount of bitumen upgraded in Alberta dropped to 50 percent. Besides, 50,000 b/d of upgrading would hardly be much of a hedge, when daily bitumen production in Alberta hits two or three million b/d. Our conversation ended there.

So, in the end, the new NWU arrangement—packaged as “Refine it where you mine it!”—was presented to cabinet and caucus as a done deal that would deliver on the premier’s promise to incentivize more upgrading in Alberta. Caucus heard a lot about capturing the “value added,” but was told almost nothing about the significant financial risk the GOA was now assuming. I am certain that the majority of caucus did not even understand the changes that had been made to the original deal.

But I did not voice my objections. After six months of losing these arguments with the premier’s office, I was not going to take him on in front of the entire caucus. I was still his finance minister, and I was going to need his support for the spending cuts I would be proposing in upcoming Budget 2011. Cheered on by Edmonton-area ministers and MLAs, the package got a free pass in caucus. The one concession my objections had produced was a hard cap on the GOA’s liability on construction costs. By 2011, capital costs were estimated at $5.7 billion. The plan approved by caucus included a guarantee that any cost overruns above $6.5 billion could not be added to the GOA’s processing toll.

***

Six months after my defeat in the 2012 election, NWU sanctioned phase one of the new upgrader. Over the next decade, all my worst fears about the NWU came true. Despite promises, costs continued to rise. North West’s CEO Ian MacGregor acknowledged that cost overruns were a risk but assured an all-party committee of the Alberta legislature:

We plan to build it for $5.7 billion, and our fee structure runs out at $6.5 billion. I get a lot of questions about: what happens if this costs more than $6.5 billion? My answer is: ‘It’s not going to. We meant $5.7 billion when we said it, and here’s the planning and the amount of work.’ We spent $800 million proving that we can do it for that. I mean, those are the things you have to meet.³⁷

This cap was confirmed in the Report of the All-Party Legislative Committee in May 2013.³⁸ Five months later in October, Premier Redford participated in the official ground-breaking ceremony. There were smiles all around.

Two months later, the smiles were gone. In a press release just days before Christmas (when governments hope that no one is paying attention to the news), the GOA quietly announced that cost overruns had driven the total construction costs to $8.5 billion, and the expected completion date was extended twelve months to 2017. In addition, the GOA would now loan NWU $300 million to help with interim financing. The original $6.5 billion cap was nowhere mentioned. By 2020, construction costs had risen to $10 billion, and by 2023, to $11 billion.

In 2013, an independent study done by the respected energy-consulting firm IHS CERA concluded that “the province creates more jobs and benefits by not upgrading bitumen.”³⁹ It cited the additional demand that constructing NWU would put on Alberta’s already-constrained labour market. Building the upgrader, it concluded, would result in higher costs for other oil sands projects because of higher labour costs. These higher costs in turn result in decreased royalties and taxes to the GOA.⁴⁰

Higher construction costs mean higher tolls that the GOA was (and is) legally obligated to pay for processing its bitumen. By 2023, the toll had increased from the original figure of $19 billion to $35 billion over the next sixty years. Yes, sixty years, to 2083. To accommodate the spiralling costs and tolls, the GOA agreed to extend its commitment from thirty years to sixty. Needless to say, there are multiple risks in this new commitment, not the least of which is whether there will still even be a market for the diesel fuel that NWU produces.

Then do the math. Rather than paying a toll of $39 per barrel, the new toll works out to $73 per barrel. According to the Energy Resources Conservation Board (ERCB), North West Upgrader could still be profitable at this rate, if all its optimistic assumptions prove accurate. But if they don’t, the GOA is on the hook for $35 billion in tolls and paying all remaining debt.⁴¹ And as for things not working out, for nine months in 2018–19, the NWU had operational difficulties and could not process any bitumen. But thanks to the “take or pay” provisions I had fought so hard to delete, the GOA was still paying $750,000 a day in tolls, even though no bitumen was being processed.⁴²

This was the “bitumen boondoggle” inherited by Rachel Notley and the NDP in 2015; and then Jason Kenney and the UCP in 2019. Kenney’s mandate to his new energy minister, Sonya Savage, was to try to stop the financial hemorrhaging. They hoped that the GOA could simply cancel the contract. But of course, they couldn’t. So as a least-worst option, Minister Savage engineered a buyout in which the GOA purchased a 50 percent ownership share in NWU. $425 million was paid to North West (Ian McGregor’s company) and $400 million to CNRL. As an owner, the GOA is now on both sides of the deal: it is on the receiving side of the tolls that it pays to have its bitumen upgraded. But it also means that the GOA is now fully in the bitumen upgrading business for the next six decades.

The only bright side of this affair is that it could have been twice as bad. During the first six months of 2011—while I was occupied with the leadership race to replace him—Stelmach had been persuaded to approve a second upgrader project in the Edmonton area. It was to be financed the same way as North West—with all the risks on the GOA. As the new energy minister in the Redford government, I vetoed it as soon as I learned about it. (See chapter 10.)

Postscript

The BRIK/NWU project spanned five different PC energy ministers⁴³ (including myself) and four different PC premiers. It took on an inertia of its own, sustained by its bureaucratic supporters in the ERCB, Edmonton-area MLAs, and most of the Edmonton business community. Over these eight years there was a glaring lack of effective government oversight and due diligence. While I did not realize it while I was in government, the NWU is just the most recent installment in a long “legacy of loss” in the GOA’s attempts at economic diversification and valued-added initiatives.⁴⁴ The twisted tale of how the NWU came to be is wholly consistent with the economic literature on “forced growth.”

Forced growth denotes government-led initiatives to use public funds—whether in the form of grants, subsidies, loan-guarantees, tax-breaks, or some combination of all four—to attract private sector companies to develop new companies or other forms of economic activity within their jurisdictions. The forced-growth literature reveals a pattern of economic failures. The factors contributing to this pattern of policy failure include the following:

• Such projects tend to be motivated more by politics than by actual or potential economic viability.
• Typically there is no high-quality, independent, professional assessment of the proposed project’s long-term economic viability, which results in an underestimation of the risks.
• Unequal expertise means that governments tend to be out-negotiated by their more experienced private sector counterparts.
• As a result, there is a tendency for governments to take most of the risks, provide most of the capital, and receive little of the profits, when there are any.⁴⁵

Evidence of all of these factors can be found to varying degrees in the eight-year genesis from the original low-cost, low-risk BRIK policy to the high-cost, high-risk North West Upgrader. Future Alberta governments should think long and hard before succumbing to future versions of diversification siren songs like “refine it where you mine it.”