INVESTING IN CANADIAN CAPITAL MARKETS

The Post-Petroleum Global Economy and Alberta 's Unique Competitive Advantage

There are major competitiveness challenges to Canada today:  how public policies facilitate innovation and, as a byproduct, productivity;   how we create national capital markets which contribute to efficient and visionary economic decision-making; and how Canada assists Calgary in becoming the economic center of innovative deal-making as the global energy system is restructured.   This is the key to longterm global competitiveness and anyone concerned with our national performance and prosperity needs to answer how they plan to implement this goal.
            One of my first entries into national public policy discussions was in 1982 to oppose the federal government's proposed legislation (Bill  S-31) which would have limited the investment and acquisition activities of provincial crown agencies.  While it was directed at Quebec's  Caisse de Depot (now CDP), it seemed to me at the time a huge mistake to restrict the economic role of provinces if their activity created more efficient national capital market activity, which should have been the federal government's primary objective.   Twenty-five years later, in a very different political environment, we confront the same questions about how we want provincial "capacities" to engage in national economic decision-making.    Nowhere is this more important than in the current fiscal discussions of federalism and the strategic discussion of the management of Alberta 's economic legacy.


Let us just assume that we knew that we would end our current level of supply of hydrocarbon based fuels on March 17, 2106.     The current debates about how to invest in energy supply would, of course, be unaffected.    The immediate concerns driving the search for a market-driven approach to energy would still be affected tomorrow morning by (i) our concern over the investing power through global capital markets of the Saudi Royal family and President Chavez; (ii) the quality of life given the urban atmosphere in Shenzhen and Beijing as viewed by the increasingly relevant consumer preferences of middle class Chinese citizens.

            For a decade now, it has been imperative that investors in Montreal and Toronto calculate how Canadian capital markets play in the global capital market led new development of energy.  But the key North American center of the new global energy economy is Calgary .   The challenge of investing in the new global economy is to figure out from a position of oil wealth how to transform the regional capital markets and how to play in the global energy markets.   Only Norway and Alberta show that they have an understanding of these issues. With the recent creation of the Gulf venture Capital fund, Dubai , Bahrain and Malaysia show that they too are developing an infrastructure of diversification.   Right now, however,  the primary effect of   petro-investing has been to redirect capital market activities in Russia , Nigeria , Venezuela , and Saudi Arabia   and create pockets of accumulated capital to be disbursed , at best, erratically

            The challenge for Alberta capital markets is that they need to simultaneously:

1. fulfill the Lougheed project of diversifying the domestic investment capability in knowledge industries, medical technologies, alternative energy capacities; 
2.  play whatever role is deemed appropriate by Alberta decision-makers in the development of efficient national capital markets, through either (a) rejecting the S-31 logic and actively restructuring domestic Canadian industries and facilitating Canada's global competitiveness,  (b) becoming a Zurich-style wealth management center with a consolidated expertise in ensuring an appropriate return on Alberta's petro-wealth,  (c) becoming a model like Investors Group in Sweden which acquires strategic assets which work to the benefit of head offices in Calgary,  like Shaw and Telus; and
3.  Develop a global cluster of energy  investing capacities which become the private market epicenter of global oil and energy diversification activities.

            Alberta is well on the way to fulfilling the Lougheed project.  It has the capacity through oil and gas financing activities in to link globally either as an acquisition target or using petro-revenues as acquisition capital to fulfill the role of a global center of capital markets.    The challenge for the Alberta Treasury in the Harper era is to choose what role to play in  the Canadian national capital markets .
           
            In the evolving global economy, the capacity to do deals in India or Dubai is one thing which distinguishes major players from  other corporate entities whose capacity is limited to a regional role.  Calgary is already positioned to the driver of a number of deals in this maturing global economy.    Like Norsk Hydro and Nokia, Calgary institutions  can be  players in Shenzhen or Dubai .    This, in and of itself makes its role different than the role played by a regional stock exchange like the Toronto stock exchange whose current role has to be redesigned to meet these new global and national conditions.     

            In the emerging global capital markets, petro-capital remains an elusive concept to articulate.    The development of a network of petrodollar-financed crony capitalism and thinly disguised state capital has confused and confounded much of the analysis of contemporary investment decision-making.    The  case studies of Dubai Ports and the Chinese acquisitions  using state-owned companies  (the proposed Noranda deal, the actual petroKazakhstan deal)  have created a very different dynamic in the current round of globalization.   In the first globalization round of 1990-1997, globalization meant the opening of domestic capital markets to foreign investors, almost always American or European.  Sometimes the phenomenon was funds investing in Peruvian equities.  Sometimes the phenomenon was the "cashing out" of domestic enterprises on the Karachi or Cairo exchanges.  Sometimes the phenomenon was the entry of funds into rapid-growth markets like Malaysia or Thailand , the tigers of their day.    In the next round of globalization, 2003-20xx, the process has been reversed.  Capital formed as oil capital and capital that has become part of the state apparatus of China , Russia , Venezuela , Saudi Arabia or Dubai now has the potential to make acquisitions in the "mature" markets, purchasing Pacific and Orient, Petrokazakhstan, and making bids on Noranda.       In this new capital market, it is essential to understand the power of oil-denominated acquisition capital and the potential for its financial role beyond the oil and gas sector.   It is this world that  the new Calgary and Canadian  financial markets are entering and needs to shape.

            As a non-Albertan whose only interest is as a Canadian who wants to see nationally beneficial economic policies develop over the next decade, let me make a tentative suggestion as to how the diversification debate  and the development of a Canadian capital market capable of strategic global capital market activity could take place.   ( I think the comparisons of Alberta , Norway and Dubai should become one of the "core curriculum" points of Canadian B-Schools,  not just Alberta 's B-Schools but let us leave that discussion for another occasion.)

            In managing a public portfolio based on a resource economy, disciplined and strategic investors have to balance at least five demands:

1. the inevitable tendency  to cross-subsidize current needs;
2. the imperative to create a passive diversified portfolio to generate income and diversify risk;
3. the imperative to purchase cultural and diversified economic benefits;
4. the strategic objectives which require leveraging the competences which give rise to the wealth in order to invest globally;
5. The building of strategic alliances to ensure that collateral objectives are met consistent with the strategic priorities of the government.

The first demand (a) will always be a reality and the test of fiscal management is the extent to which this demand is met responsibly.   The second demand (b) is what pension and endowment funds do all the time and requires skilled fund managers.  The strategic question is what percentage of the fund is allocated to (b).   Diversification strategies (c) require discipline as much as  (a).  However, there are growth-oriented private equity and alternative investment instruments which have shown a capacity to identify venture capital funds which could be backed on the condition that a certain percentage of the equity disbursed is located in Alberta ventures.    It is in (d) and (e) that Alberta 's strategies have national, continental and global implications and possibilities.     Alberta investment in growth opportunities globally already happened.  

From Hurricane Hydrocarbons to companies exploring off-shore oil in India , Calgary 's "cluster" or hub of competences has always been able to generate entrepreneurial activities focused on global opportunities.   In terms of oil and gas and energy sectors, the question is whether there is an advantage to designing funds which leverage energy management expertise to seek out growth opportunities and position Calgary as being the hub or switchboard of global energy investing.   This is a difficult decision to make. First, the political decision has to be made as to how much value should be placed on creating efficient Canadian strategic alliances in energy.  A second decision is how much value should be attached to creating continental alliances.   However, if the goal is to become more a driver of international energy markets, investment decisions have to be made in a manner which has a hand in a number of games.   A syndicate of Norsk Hydro, Hydro Quebec and Alberta Treasury on investing in Indian energy management capabilities could conceivable make sense.   Similarly, emerging partnerships between China and India in areas like Kazakhstan , of which Calgary decision-makers have firsthand experience suggest another possible pattern of deals with local competences in energy investment banking developing to lead such future deals.


For Albertans, the choices involve a calculation of how capital market strategies and legacy investment strategies should have an impact on federal-provincial relations.  I am frequently criticized for ignoring the federal character of Canada in some of these policy discussions.   I plead guilty with qualifications.   I tend to focus on those things which can be done to create win-win situations within the federal power.   But there is also another consideration:  I believe since the discussion in the early 1980s around S-31   that a cornerstone of future Canadian federalism lay with the economic powers of the provinces, the CDP and the Alberta Heritage Fund,  or, at that time, a potentially privatized Manitoba Hydro, Ontario Hydro or Nova Scotia Power.   I also believed that these kinds of economic players would find ways to create win-win deals in the marketplace creating greater national unity and also a more efficiently operating capital market.   I continue to believe this.     The challenge to Albertans is how much they want to use their capital market power to affect this outcome.  Put differently, how much of the legacy investment should be invested in creating interprovincial efficiencies, exploring opportunities in other jurisdictions, in working with the federal government as an economic partner rather than a jurisdictional antagonist or rival?  

If asked, my contributions to the Alberta debate would be that diversification and global networks come first and that this can be done in a manner compatible with a national reversal-of-the-spirti-of-S31 strategy.    The alternative seems to me to be both lost opportunities and inevitable political complications.    Needless to say, this is one of the most significant capital market debates in Canada right now.