Immediate outrage from Alberta’s official opposition greeted the introduction of the Reform of Agencies, Boards, and Commissions and Government Enterprises Act on Monday, 18 November. While the opposition NDP focused on the political aspects of the firing of Lorne Gibson- his position was abolished by the Act- careful study shows the legislation will have significant implications beyond the political party sphere. The 172 page omnibus bill, introduced by Treasury Board President and Finance Minister Travis Toews, is part of the legislation necessary to give effect to some of the 24 October budget announcements. This analysis and opinion piece is devoted to three of the most important financial institutions owned by the Alberta Crown.
Before commenting on the details in Bill 22, it is important to note that in the UCP’s election platform, there was no mention of pensions, ATB, ACFA or AIMCo. In the case of the CPP there were two references in relation to the CPP being a payroll tax. There were however certainly many references to measures to reduce red tape and to streamline government organization.
The bill eliminates many small entities and members of the general public will likely applaud the demise of such entities as the Alberta Historical Resources Foundation, the Historical resources Fund, or Alberta Sport Connection or the repeal of the Alberta Competitiveness Act.
The legislation, ostensibly to improve the performance of some provincial agencies, and generate cost savings, will affect the governance of the three largest provincial financial agencies.
Source: https://acfa.gov.ab.ca/
The boldest of the changes, besides “merging” the Elections Commission into the Office of the Chief Electoral Officer, are amendments to the Alberta Capital Finance Authority. The Bill, terminated the appointments to the ACFA’s board of directors and cancelled all shares of the corporation. The capital stock of the Corporation was transformed into own share owned by the government. Further Cabinet was given the ability to appoint one director to administer the corporation. It is also not clear if any consultation preceded the changes. This lack of notice is consistent with the case of the public pension and ATRF changes. This move is consistent with a centralization of control agenda.
What is the Alberta Capital Finance Authority (ACFA)? It was originally established in 1956 as the Alberta Municipal Financing Authority. The company was renamed to ACFA to reflect wider financing mandate including infrastructure loans to Regional Airport Authorities and universities. The corporation is a corporate conduit which borrows money from the province with its stronger credit rating and then “on-lends” the money to municipal governments. Municipal principal and interest payments eventually flow back to the provincial government to retire maturing obligations. The corporation and its board of directors, made up of representatives of the borrowers, was a coordinating mechanism to allow municipalities and other provincial entities to borrow for certain capital needs at very favourable rates.
ACFA had almost $16 billion in loans outstanding at the end of December 2018. The organization had debts outstanding of $16 billion. The entity had a small $2 million accumulated deficit (that is no capital left) caused by “accumulated remeasurement losses on derivatives.” These losses of $488 million offset an accumulated surplus of $486 million built up since the corporation began operations. The financial statements contain a separate “Statement of Remeasurement Gains and Losses.” Such accumulated gains and losses come from changes in exchange rates and interest rates on which derivative financial contracts at financial year-end are annually calculated and restated.
The board of directors was structured according to different classes of shares (now abolished -see box) which gave various institutional shareholders the capacity, through voting rights, to elect a certain number of directors. According to the Board’s 2017 Annual Report:
The Board is comprised of five members appointed by the Lieutenant Governor in Council and four members each elected by different classes of shareholders (other than the Class A shareholder, being the Province), all in accordance with the provisions of the Alberta Capital Finance Authority Act and the bylaws of the Corporation. Directors are appointed or elected for a fixed term of up to three years, with the potential for reappointment.
The former board was responsible for “the governance of ACFA and overseeing the management of ACFA’s business and affairs. The Board guides ACFA’s strategic direction, evaluates the performance of ACFA, approves and monitors ACFA’s business plan, operational plan and financial results and is ultimately accountable to the Minister and shareholders.”
What will be distressing to municipalities, universities, and other beneficiaries of ACFA’s lending program is the transformation of the corporation. Currently four board members represent sectors borrowing from the ACFA. While one of the possible reasons of abolishing the board and eliminating the share structure (see box below) is the avoidance of conflicts of interest between the lender and the borrowing institutions, Canadian banks have historically had boards filled with borrowers. The change may result in some small savings in administration costs ($1 million- primarily $856,000 in salaries and benefits ($132,000 over budget in 2018); and $286,000 in services) and only modest director compensation of $32,000 in 2018.
| 4(1) The share capital of the Corporation shall consist of (a) 4500 Class A shares to be allotted only to Her Majesty the Queen in right of Alberta, (b) 1000 Class B shares to be allotted only to municipal authorities, health authorities and regional authorities, (c) 750 Class C shares to be allotted only to cities, (d) 750 Class D shares to be allotted only to towns, and (e) 500 Class E shares to be allotted only to educational authorities. |
The amendments are another example of the province eroding the municipalities’ and other public sector institutions’ input into financing decisions. This action is another reminder of the inferior legal status of municipal and other public institutions.
ATB Financial
The amendments to the ATB Financial Act are also interesting and unexpected and raise some questions about how executive management at the $54 billion financial institution . THe change introduced and passed includes a new section called “business objectives.” The section reads:
11.1 In carrying out its objectives ATB shall:
(a) manage its business in a commercial and cost-effective
manner,
(b) seek to earn risk-adjusted rates of return that are similar
to or better than the returns of comparable financial
institutions in both the short term and the long term, and
(c) avoid an undue risk of loss by prudently managing its
business, which includes establishing and implementing
relevant plans, policies, standards and procedures.
The provenance of the wording comes from a long history dating back to the mid 1990s when Jim Dinning brought structural changes to Treasury Branches creating a board of directors and an audit committee. This fundamental change was accompanied by a ministerial letter to ATB’s first Board Chair Marshall Williams directing ATB to “optimize profits” and to operate in a “prudent manner on a commercial basis” (Treasurer Jim Dinning to Marshall Williams, March 1996. Legislative Assembly, Sessional Paper747/ 96) . This first step followed the scandal at ATB involving loan guarantees to the West Edmonton Mall as well as other large commercial loans (e.g. Edmonton Oilers).
The second phase, completed under Treasurer Stockwell Day, was establishing ATB as a stand alone provincial corporation. More recent developments affecting ATB has been the application of the Alberta Provincial Agencies Governance Act to provincial agencies in 2009. The Act established a more formalized structure requiring a mandate and roles document codifying understandings between ministers and their agencies. The document, required to be public, set outs policy direction (if any) and accountability of the board, minister, deputy minister and CEO.
In section I(3)(b) of the Mandate and Roles document, ATB is to ensure that business decisions are made “in a sound commercial fashion within a prudential framework set by the applicable legislation, regulation and Guidelines and the strategic framework set by the business plan.” In section I(5):
ATB shall foster competition for financial services throughout Alberta to promote access to financial services and strong financial services providers by operating on sound financial institution and business principles with the objective of earning a return that is fair in the context of its Mandate and the broad strategic policies and level of risk agreed to by the Minister and ATB.
This change is a fundamental shift in policy direction for ATB as it removes the soft public policy mandates in the Mandate and Roles document. It very clearly sends a message to the board- to seek (whatever that might mean in practical terms) to earn risk-adjusted rates of return that are similar to or better than the returns of comparable financial institutions in both the short term and the long term” (emphasis added).
It has been well known that ATB’s performance has been poor relative to its Big Five competitors (Ascah and Anielski, 2019, pp. 26-28). It is possible that this move is a signal to the board and management that its lending program to the energy sector of about $3.9 billion (up from $34 billion in the past six months) may come under increasing scrutiny by the board and by implication the government. If ATB’s lending policies are more risky than its competitors (given the nature of Alberta’s single commodity economy), one would expect much higher risk-adjusted returns to the government as the 100 per cent owner. This new direction does come at a time when Alberta’s economy continues to struggle. An aggressive attempt to clean up its loan book might see more smaller oil and gas companies placed in receivership as oil and natural gas prices continue to languish. In the short-term however this would be mean losses or might it be better in the long-term to wait and hope through forbearance agreements for oil and gas prices to recover? The January decision by the Supreme Court in the Redwater decision means that creditors, like ATB, cannot escape clean-up liabilities through bankruptcy. This adds additional pressure in the Corporate Financial Services group which by far accounts for the lion’s share of ATB profits.
AIMCo
The amendments to the Alberta Investment Management Corporation Act, may have enormous implications for boards like the Local Authorities Pension Plan (LAPP). Under the Joint Governance of Public Sector Pension Plans Act changes introduced in 2018 by the former government, LAPP and other public sector pension plans were granted the ability to move investment funds out of AIMCo at a certain future date. The logic behind this change, recommended in my 2016 paper published by the Institute for Public Economics, was that if the monopoly AIMCo enjoyed was revoked, this measure would improve both the investment performance and responsiveness of AIMCo’s management to their clients (p. 43).
This idea has gone by the board. Consistent with other measures, the government is centralizing ever more investment management with AIMCo. All of AIMCo’s directors are appointed by the provincial cabinet. With the $16.5 billion of the Teachers’ Retirement Pension Fund, the Workers’ Compensation Board assets ($10.7 billion), and possibly CPP monies, AIMCo will become a juggernaut. The ostensible reason is cost savings. Certainly over time, savings could be achievable as duplicate executive, finance, human resources, and “back office” functions are eliminated. These measures will take time and, with severance costs and complex information systems converted, it is no sure thing that the promised savings will be realized.
Source: Wikipedia
Potentially problematic is the precedent set by the former government in Joe Ceci’s first budget where he directed AIMCo to direct a maximum of 3 per cent of the Heritage Fund into Alberta investment to assist Alberta-based companies. Fast forward this significant policy initiative to recent bankruptcies in Alberta’s crippled conventional oil and gas sector. With the failure of Trident Resources, we know that $60.3 million of, presumably, Heritage Fund monies are at risk (ATB is owed $5.65 million).
The statement presumably Heritage Fund monies is not entirely correct. According to the annual report of the Heritage Fund, which lists investments under the “Alberta Growth Mandate,” the Fund’s investment at March 31, 2019 was $12.3 or roughly one-fifth of the AIMCo investment. The remainder would be held among other funds managed by AIMCo for various pension funds, including the Local Authorities Pension Plan.
At the end of March, $406.2 million of the about $500 million limit had been invested under this growth mandate. The investments range from direct investments in real estate, equity, debt, warrants, loan facilities, and private equity. Besides real estate investments, the majority of investments tend to be in Alberta’s energy sector.
The investments made must meet at least one of the following characteristics:
a. Creates jobs in Alberta
b. Builds new infrastructure in Alberta
c. Diversifies Alberta’s economy
d. Supports Alberta’s growth
e. Connects Alberta’s companies to export markets
f. Develops subject matter expertise within Alberta
The largest investments are in conventional oil and gas companies including Calfrac Well Services ($46.4 million), Savanna Energy ($46.1 million), Western Energy Services ($43.8 million), and Kinder Morgan Canada ($29.1 million). In addition, the Fund has one investment in renewable energy TransAlta Resources which received a $45.9 million equity injection in November 2015.
It is curious that the growth mandate has been so heavily directed into the energy sector when the former government emphasized the need for economic diversification. Certainly a prime goal was to create jobs but the conventional oil and gas sector has been shedding jobs over the past four years. Perhaps these investments have been more oriented to maintaining jobs as opposed to creating them. Time will tell how well these high risk investments will turn out.
Another question emerges from the statement on page 120 of the provincial budget under the heading “Increase investment in AIMCo: To build a “made in Alberta” portfolio for healthy public investment, the volume of funds invested must be big enough to support optimum earnings and minimize costs.” In theory, his move makes sense. In practice it begs the question about what a made in Alberta portfolio for healthy public investment actually means. Does it mean following a model like the Caisse de Depot et placement du Quebec whereby the Caisse’s investment activity is scrutinized for its decisions “in support of Quebec’s economic development?”
The newfound interest in the Canada Pension Plan is also relevant in light of the Premier’s letter to the Fair Deal Panel including its suggestion of emulating Quebec’s role in international relations. Is Alberta looking to establish a Caisse look-alike to support Alberta’s economic development? If so, what does this actually mean for public pension funds and who determines the nature of Alberta’s “economic development?”