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Raise Potash Royalties

This blog has long been critiquing Saskatchewan’s inadequate potash royalties. But every time I check the numbers, I am again shocked by how low they have fallen. In 2010, the Potash Corporation of Saskatchewan paid just a nickel in provincial royalties for every dollar of gross margin it made on potash.

I have the following op-ed in today’s Saskatoon StarPhoenix:

Time to Review Potash Royalties

By Erin Weir, The StarPhoenix, February 10, 2011

Following is the view point of Weir, a Saskatchewan expatriate and senior economist at the International Trade Union Confederation in Brussels, Belgium.

The opposition in Saskatchewan is proposing a review of potash royalties to ensure a fair return for the province’s people. The government and the Potash Corporation of Saskatchewan (PCS) respond by saying that to raise royalties would reduce investment and employment.

The evidence, however, indicates that Saskatchewan is collecting far too little revenue from potash and could collect substantially more without impeding development.

Although private companies operate potash mines, the people of Saskatchewan own the potash. Royalties are the price that the provincial government charges companies to extract it.

PCS recently reported a gross margin of $1.8 billion on potash for 2010. In other words, the value of its potash sales exceeded production and transportation costs by $1.8 billion. Since 90 per cent of PCS’s potash comes from Saskatchewan mines, they presumably accounted for about $1.6 billion.

Meanwhile, PCS paid potash royalties of $77 million, just five per cent of the gross margin. Royalties were equally low in 2009, and PCS projects that they will be again in 2011: “Provincial mining and other taxes are expected to approximate four to six per cent of total potash gross margin,” it notes.

By contrast, from 1998 through 2003, the royalties ranged between 25 and 31 per cent of the company’s potash gross margin. In each of 1999 and 2000, for example, PCS paid $77 million from gross margins of $300 million. Today, the mines are six times as profitable, but still pay exactly the same dollar value of royalties.

Why has Saskatchewan’s potash revenue not increased along with production, prices and profits? The potash royalties include a base payment and profit tax. In 2003 and 2005, the former NDP government instituted a base-payment holiday on 10 years of production from mine expansions, a never-ending holiday from profit tax on sales above the 2001-2002 average, and a deduction of 120 per cent of new capital spending in the profit-tax calculation.

As a result, potash companies immediately write off more than the full cost of investments against profits from long-established production, and after that pay almost no royalties on new production. Each company must pay profit tax on a minimum of 35 per cent of sales, but even those profits are reduced by write-offs.

Premier Brad Wall and PotashCorp CEO Bill Doyle insist that this extremely generous regime is needed for mine expansions to proceed. However, Saskatchewan already has a huge competitive advantage because it is much cheaper to expand existing mines in the province than to build new mines elsewhere.

Potash prices have tripled since 2004. Incentives that might have seemed reasonable to prompt mine expansions in August 2003 or April 2005 are not needed to justify continuing those expansions today.

BHP Billiton is proceeding with its Jansen Lake project even though it has no current profits from potash from which to deduct development costs. While existing producers enjoy the profit-tax holiday on all new sales, BHP will receive it only on new sales in excess of a million tons annually, or one-quarter of new sales before reaching that threshold.

It is unclear why PCS, Mosaic and Agrium require huge royalty concessions to expand existing mines when BHP is planning to build a new mine in Saskatchewan based on significantly less generous treatment.

Even if the government continues some or all of its incentives for new production, there are other ways to increase revenue. For example, profittax rates could be raised on sales up to the 2001-2002 average.

Of course, Doyle’s job is to maximize profits for his shareholders. It is easy to understand why he wants to keep royalties as low as possible.

However, Wall’s “shareholders” are the citizens of Saskatchewan. His speech that rejected BHP’s takeover bid for PCS seemed to recognize the public interest. Specifically, Wall referred to, “Your revenue, the rent you should be getting for the resource that you own.”

In the months since then, Wall has done nothing to ensure that Saskatchewan people get a fair share of revenue from the resource they own. A review of potash royalties would be a good first step in that direction.

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