Mandryk on Potash: A Union Hack Responds
Murray Mandryk, CanWestâ€™s seasoned Saskatchewan political columnist, has been writing some pretty sharp columns on potash. In particular, he questions excessively low resource royalties:
. . . the messaging from Energy Minister Bill Boyd that his government wouldnâ€™t touch oil royalty rates (even when it was selling at $150 a barrel), and the potash companies should get most anything they want to encourage mine expansion.
But I wondered whether the following portion of last Saturdayâ€™s column should make my ears burn:
. . . hearings in the legislature that would serve little purpose other than providing a forum for the unions to happily repeat [provincial NDP leader, Dwain] Lingenfelterâ€™s nonsensical, biased rhetoric that if we had only held on to that Crown potash corporation we sold in 1989 for $630 million we could privatize it for $38.6 billion right now.
My Leader-Post op-ed, which opened by contrasting the $630 million and $38.6 billion, may well be the origin of that allegedly â€œnonsensical, biased rhetoric.â€ Lingenfelter reportedly added the fact that Grant Devineâ€™s former Conservative government took on substantial debt from Potash Corp as it was privatized, so the government did not really gain $630 million.
I did not get into that point because the Devine government also extracted unsustainably large dividends from Potash Corp in the years preceding privatization. One should probably subtract the extra dividends paid to the province from the debt transferred to the province.
A 750-word op-ed was not the best format to disentangle all of that financial history. My point was that, even making the most optimistic assumptions about what Saskatchewan might have gained from potash privatization, it was still the worst fiscal decision in provincial history.
Of course, Mandryk is right that just bemoaning how the province got hosed in selling Potash Corp is not much of a policy position going forward. But why does he assume thatÂ â€œthe unionsâ€ have nothing more to say?
Mandryk correctly suggests that the real debate is, or should be, about Saskatchewanâ€™s royalty regime. My op-ed assessed how much the public lost through privatization to set the stage for a discussion of how much could be recouped by increasing royalties. (The subsequent version printed in the Saskatoon StarPhoenix follows.)
Indeed, the United Steelworkers have been ahead of the curve on this question. A couple of years ago, we had op-eds published in both The StarPhoenix and Leader-Post critiquing royalty giveaways to potash companies.
I also spoke at the Saskatchewan Federation of Labourâ€™s convention about how the provincial government could collect higher royalties from both oil and potash. So, if Mandryk is looking for more discussion of resource royalties, he should give unions some credit.
Maximize Public Gain From Potash
By Erin Weir, Special to The StarPhoenix, September 3, 2010
The editorial, Province Should Keep Hands Off Any Potash Deal (SP, Aug. 28) began: â€œIf the Saskatchewan government believes it knows best how to manage a potash company, it should buy or build one.â€ Of course, it actually did establish the Potash Corporation of Saskatchewan (PCS) in 1975.
Unfortunately, the provincial government sold off all the shares between 1989 and 1994 for $630 million. BHP Billitonâ€™s $38.6 billion US bid for PCS underscores the folly of that privatization.
Presumably, the $630 million was deducted from provincial deficits. Had that amount been borrowed at 10 per cent interest, compounded over two decades, the total Saskatchewan debt would be $4.2 billion larger by now.
In fact, provincial bond rates have fallen far below 10 per cent since the early 1990s. Also, had PCS shares not been sold, dividend payments to the government would have partly offset interest charges on its additional borrowing. Therefore, $4.2 billion is a very optimistic estimate of privatizationâ€™s fiscal benefit.
The fiscal cost of privatization is the amount that PCS would be worth had it remained a Crown corporation. Since privatization, PCS has acquired additional potash mines in Saskatchewan and New Brunswick, phosphate and nitrogen facilities in the United States and Trinidad, and shares in other fertilizer companies.
During the 1990s, Crown corporations were encouraged to invest outside the province. Therefore, PCS could have made the same acquisitions and developed along the same lines had it remained a Crown. If so, the fiscal cost of privatization is at least $40 billion (the Canadian-dollar value of BHPâ€™s offer), which is about 10 times the maximum fiscal benefit.
Of course, privatization supporters would claim that PCS has been better managed as a private company, and that, had it remained a Crown corporation, it might have lacked the initiative or financing to expand.
However, the mines that PCS owned in 1989 still account for 80 per cent of its potash production and capacity. Since 70 per cent of the companyâ€™s current gross margin is from potash (rather than phosphate and nitrogen), these mines still provide at least 55 per cent of overall profits today.
If PCS had simply held onto those historic assets, it would now be worth more than half of todayâ€™s value. Even assuming that PCS would have completely stagnated as a Crown corporation after 1989, the fiscal cost of privatization was still more than five times the maximum fiscal benefit.
Depending upon which assumptions one accepts, the costs of privatization exceeded the benefits by between $18 billion and $36 billion. In other words, the Saskatchewan government gave up between $17,000 and $35,000 for every man, woman and child in the province.
Saskatchewanâ€™s potash reserves still belong to the public. As The SP editorial notes, the provincial government has wide latitude to collect royalties from PCS and other companies that mine those reserves.
Unfortunately, royalties have been slashed. Saskatchewanâ€™s misguided royalty holidays on increased potash production in 2003 and 2005 simply prompted the U.S. and New Brunswick to cut their potash royalties.
This race to the bottom has robbed Saskatchewan residents of an appropriate return on their resource. Potash companies extracted the same tonnage from the province in 2005 and 2008. Entirely due to price increases, this output was worth $4.7 billion more in 2008 than in 2005.
Most of this gain should have accrued to the people of Saskatchewan, who own the resource. Yet provincial potash royalties rose by only $1.1 billion between the 2005 and 2008 fiscal years.
The provincial government then refunded much of this money to potash companies following the economic crisis. As a result, royalties actually turned negative in the 2009 fiscal year, even though the dollar value of potash sold from Saskatchewan remained higher than it had been in any year before 2007.
Of course, profits in excess of royalties are subject to corporate income tax. However, the federal government is slashing its corporate tax rate to just 15 per cent by 2012, from 29 per cent in 2000 .
Between 2006 and 2008, Saskatchewan cut its provincial rate to 12 per cent from 17 per cent. Wholly or partially reversing these corporate tax breaks would give the public a more significant fraction of future potash profits.
Privatizing PCS was the worst fiscal decision in Saskatchewanâ€™s history. Whether or not the company is taken over, governments should strengthen royalty and tax regimes to collect a fairer share of potash revenue for the public.