Compared to Norway, Canada is frittering away its wealth

AACI | Vice President, The Regional Group of Companies Inc.
  • Apr. 10, 2014

John ClarkHave you ever taken a close look at Norway?

Yes, it is sometimes a frigid and sombre land, rich in Norse history, as far north as Greenland and Iceland. It’s the second-least densely populated country in Europe, with a population of only 5.1 million.

It also comes about as close to having equal income distribution across all sectors of society as any nation on Earth can, according to the World Bank and the GINI co-efficient.

But what interests me most, and should all Canadians, is that Norway also has a huge sovereign wealth fund that ensures its oil and gas wealth will be generating returns for the nation and its citizens for decades, perhaps even centuries, after the taps have run dry.

$170,000 per person

The CBC ran an excellent feature this week on the birth and growth of Norway’s offshore oil and gas industry, and how it began in the late ’60s with an Iraqi geologist who brought his family to Norway in search of the best treatment for his son, who had cerebral palsy. His work led to the discovery of reserves that are expected to last until 2050.

Norway protected its interests by developing these resources through a national oil company, StatOil, an independent industry regulator, and a provision that StatOil would have no less than a 50 per cent share in all future discoveries with foreign oil companies.

But it’s what came next that’s important. In 1990, Norway set up a national oil fund. Only four per cent of that fund is used for general government revenue, and then, only to fund important initiatives for infrastructure, education and research.

The rest has been invested, and reinvested and has reached almost $850 billion in value, or about $170,000 per person – the largest sovereign wealth fund in the world.

In Canada, meanwhile, the comparable Alberta Heritage Fund, which is 14 years older, is worth about $17 billion, according to the CBC, while the Alaska Permanent Fund sits at $50 billion.

What the Haze are we doing in this country?

Wealth creation vs. tax breaks

We have natural resources to rival any other nation on Earth – the means to solve all of our infrastructure and social safety net woes. But rather than lever the value of these resources, the politicians of the day instead cater to the electorate with tax cuts and hope to make up for loss of revenue by shortchanging our financial future, deferring infrastructure investments, and mortgaging our children. In terms of foreign ownership, it’s fair to say that less than half of Canada’s oil and gas industry, and its profits, remain in Canadian hands.

Our economic wealth should not be used to give tax breaks. Considering how much our fortunes have shifted over the past six years (I am thinking of Ontario and its weak outlook for the next two decades), it’s obvious that we can’t take our traditional economic strengths for granted. We must squirrel away whatever wealth they do generate and wisely invest until it becomes a self-sustaining revenue source for the long term.

Instead, our federal, provincial and territorial governments cry for want of cash. Old infrastructure is left to crumble, public education endures budget cut after budget cut, public healthcare is groaning under the weight of an aging population, and government pension plans face a dim future.

In Norway, taxes are still relatively high. Norwegians pay their share, perhaps even a little more. But that fiscal austerity has left government coffers able to ensure comfortable pensions for everyone. In fact, its wealth fund is now referred to as a pension fund.

It’s all about infrastructure

But my rant isn’t about funding pensions or even the social safety net – it’s about infrastructure. I watched Brian Mulroney give his speech on resources and infrastructure last week and agree that we need infrastructure investments to foster our future economy.

Building and repairing key infrastructure is the catalyst of future growth and all growth takes place on real estate.

With our huge geography, Canada needs to be investing in the infrastructure to move resources and materials from where they originate to where they are needed. Specifically, we need to focus on the hundreds of communities that lie outside of Canada’s major urban centres.

When investments in infrastructure fall off, it is the real estate sector that is the first to suffer. Improving infrastructure in parts of the country that are suffering economically, and where real estate markets are now in decline, will help drive new economic activity. It’s important to sustain real estate values in small communities; low prices, which are the norm in many markets, hurt the older generation when they need to sell up to finance their old age.

Improving our infrastructure requires a new dialogue with First Nations to get their participation and buy-in for new resource and infrastructure development. These are people with whom Canada has treaties; we need to make them part of the economic solution and allow them to benefit from owning what could be valuable real estate.  Ownership of valuable real estate can be levered into greater future wealth, and wealth is one thing often missing in First Nations communities.

North America as a whole suffers from a preoccupation with what is politically expedient and advantageous in the short term at the expense of what’s best for the long term. Canada must learn from the successes of other nations to better realize the potential of our wealth generators and make that wealth work for us.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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