Canada’s Budget for Edmonton Businesses

Last night at dinner, the discussion on the federal budget was deafening. Everyone was focused on the escalating debt and the deficit, all with spirited and good intention. But beyond the big looming debt number, not one business owner knew much about the details … the details of which are actually quite interesting.

Edmonton-based businesses have never cared much about the Federal Budget, and I totally respect the reasons why. Budgets have been for government folks, easterners, institutions and non-profits. Why would the federal budget come up in conversation, aside from taxes? What does the budget have to do with my business making money? How is the budget relevant to our day-to-day free-enterprise lives.

Part of me would love to continue asking those questions. But part of me knows that the world is changing and it’s not the smartest strategy to be left behind.

Every Edmonton-based business should read Budget 2017. I don’t mean read to simply find their new personal or corporate tax rates. But read it to understand the underlying policy and directional changes that will shape our country for the next decade or more. Budget 2017 doesn’t do much for the energy sector or for our current economic downturn, but the budget is unusually specific about the path forward and the emerging sectors that are expected to move Canada’s economy ahead.

Read it and engage; or ignore it and be left behind. Because in it, Budget 2017 has significant positive implications for Edmonton – Canada’s 5th largest, youngest, fastest growing municipality – that is being recognized as a major hub for new federal investment.

Beyond the significant support for affordable housing and predictable long-term investment for transit and infrastructure, as successfully championed by Mayor Don Iveson, this budget focused on building our economy through the solid combination of innovation and job creation. Of specific interest to Edmonton-based businesses should be:

  • $400 million over three years to be made available through the Business Development Bank for a new Venture Capital Catalyst Initiative to increase last-stage venture capital available to Canadian entrepreneurs (who submit proposals);
  • $1.4 billion in new financing support for Canada’s cleantech sector (equity finance, working capital and project finance) to promising clean technology firms who want to grow and expand;
  • $125 million to fund a pan-Canadian Artificial Intelligence collaboration between Montreal, Toronto-Waterloo and Edmonton, with UofA’s AMII (Alberta Machine Intelligence Institute) recognized as one of the leading programs in the world;
  • $950 million over 5 years to support a small number of business-led innovation “superclusters” that have the greatest potential to accelerate economic growth;
  • 10,000 new Co-op positions for STEM (science, technology, engineering, math) students;
  • Priority sectors for investment will include Advanced Manufacturing, Agri-food, Cleantech, Digital Industries, Health and Biological Sciences and Clean Energy Resources;
  • $7.8 million over two years to implement a new Global Talent Stream under the Temporary Foreign Worker Program, as part of the Global Skills Strategy;
  • No changes to capital gain taxes or taxes on stock options, which will benefit the tech sector;
  • $50 million over two years for teaching initiatives to help children learn to code; and
  • $37.5 million per year funding made permanent to Destination Canada, Canada’s national tourism marketing organization, to continue its strong collaboration with industry partners to maximize the impacts of its marketing campaigns to draw in more tourists from abroad.

Now, I’m typically one of the first people to call for balanced budgets. However, if a fiscal stimulus and low interest rates are required to keep our national economy on a positive growth curve, which they are, then these are the areas that have the ability to stimulate a long-term change to business innovation and competitiveness which we so desperately need across the nation.

The programs listed above are very much in line with our priorities at EEDC, through our Investment & Trade, Tourism, Startup Edmonton, Tec Edmonton, Edmonton Research Park and Shaw Conference Centre teams. And these are our teams that connect with local businesses on a daily basis to help Edmonton-based companies understand and benefit from these new programs and sources of funding.

Fiscal stimulus and support programs are needed across the country for our businesses to grow and evolve, adopt new technologies, access new talent and new markets and improve competitiveness. It is part of a larger transition we need to be embracing, otherwise others will and folks like my dinner guests will be left behind.

Please take time to become informed, and see each of these programs as opportunities for your business. Once informed, please connect with us at EEDC to help connect you with some of these new opportunities.

Global Intention

After university, I decided to spend a year abroad – something every student should do before they enter the workforce and inherit the conventional view of possibilities. I headed for Japan, fascinated with how this country had emerged post-WWII as a technological and economic giant. I got lucky and was asked to teach at an elementary school just south of Osaka, and this is what I learned:

Every student in Japan is taught at the elementary school age that they live on an island and that the only way to prosper is to produce goods and services for export and trade. That foundational understanding drives their whole curriculum and policy environment, and results in an entire country that is globally oriented.

Pause. Think about that for a minute. Think about the global awareness, alertness, competitiveness and connectedness that would result from multiple generations becoming globally engaged. What if:

Every student in Alberta is taught at the elementary school age that they live in a land-locked province and that the only way to prosper is to produce goods and services for export and trade. That foundational understanding would then drive the entire curriculum and policy environment, and result in an entire province that is globally oriented and competitive.

This is emerging as my new mission, core to our economic strategy, that would result in a totally new mindset, and that would be an organizing mechanism for driving wealth and prosperity for generations to come.

And that is what we need, a new mindset. For far too many years we have been far too complacent – thinking, building, trading, spending and squabbling within our provincial borders. We have developed a regional mindset, far too reliant on government, and far too disconnected from high-growth markets around the world.

The only sustainable diversification strategy is the diversification of revenue by geographic market – becoming global players – being engaged in emerging markets like China, India, Africa and Brazil that will dominate global growth in the next 20 years, as well as across higher-growth markets in North America.

Our economic future must be global – outside of Alberta. And we need to turn our attention to shaping our international competitiveness by educating our kids properly, building and maintaining economic infrastructure, investing in research and product development, pursuing international trade and investment relationships, and aligning multi-level government resources to connect our businesses to opportunities in international markets.

Japan had the plan, the commitment and the urgency.

We need to do the same.

Structure Follows Strategy

It has been a long time since Alberta had a Ministry of Economic Development & Trade, and it is long overdue. The announcement by Premier Notley last Thursday brought cheers from many across the province, as we can now establish focus and resources towards our most pressing economic issues:

  1. Building a culture of risk-taking and entrepreneurship in businesses big and small;
  2. Developing revenues, trade and investment from beyond our borders;
  3. Unlocking the value of our resource assets in mutually beneficial ways; and
  4. Leading an innovation system that is relevant and respected across Canada.

We have been talking about these four simple priorities for years as part of our provincial strategy; however, the ministerial structure never followed the strategy and past ministries lived through endless leadership changes and budget uncertainty.

This was a much needed change and, when led by a strong Minister, Deputy Minister and Premier’s Advisory Committee on the Economy, I believe we are now off to a great start.

The old models of economic development, diversification and innovation have not brought success or change, and I look forward to working with this new ministry to compete and win in today’s marketplace.

I am often hard on our government because I have high expectations. This is a timely and prudent move, and I compliment this kind of thoughtful stewardship.

I look forward to helping bring back our excellence.

Upgrading our Strategy

I used to struggle with the number of hours kids spend playing mindless video games. Minecraft, Farmville, Tropico, Settlers …. there seems to be an endless supply of, and demand for, non-violent nation-building games.

I used to think they were wasting their time. But I have come to develop great hope that they in fact are developing the skills to run our province with much greater foresight than previous generations.

Think about it. If you were given this wonderfully productive piece of land called Alberta, what would you do? What would you build? How would you create a society so productive and so prosperous that you would be the envy of the world?

Imagine digging a hole in the northeast part of the province and discovering what is now the Oil Sands – an endless supply of thick, dark, peanut butter like substance worth trillions of dollars. Would your first move be to build a railroad or pipeline and ship it out of here? Or would you build upgraders and refineries, petrochemical facilities and manufacturing factories that allowed you to control the market on everything from jet fuel to fertilizer to plastic toys?

Imagine planting a farm in southern Alberta and you were able to produce high quality Durham wheat. Would your first move be to harvest the crop and put it in rail cars to be shipped to a pasta plant in Italy? Or would you consider building your own pasta company, under a Canadian brand that exports and competes worldwide?

Imagine raising cattle on some of that land. Would your first move be to sell your young cattle to someone across the border who will beef them up before sending them to a slaughterhouse? Or would you consider building your own beef processing plant, a steak & hamburger restaurant chain or Alberta BBQ beef skewers which are exported to China.

Just daydreaming here … but you get the point.

Occasionally, opportunities present themselves to re-start the game, and to make better decisions. Over the past decade, building value-added upgraders and refineries didn’t make a lot of financial sense as margins were better from existing refineries south of the border. But now as labour becomes more available, input costs come down, the Canadian dollar falls, technologies are improved, risk of building upgraders/refineries have been mitigated, and neighboring provinces refuse unrefined products through pipelines, it’s time to think strategically and make some nation-building investments.

We can keep shipping stuff out of here and shipping out our wealth in the process. But these video-game-addicted kids are telling me that’s not the best way to win the game.

No Holiday Here

Last week my holidays were spent reflecting on what’s going on in the world and what it means for us in Edmonton. I started the year with the phone ringing off the hook by very anxious people wanting to talk about the fall in the price of oil, the provincial budget and the impact on their businesses … and I returned to the office this week to quickly realize that the phone is still ringing.

So, I thought I’d take this opportunity to share some of my recent speaking notes, and to encourage a collective call to action.

2014: The Year of Living Anxiously

Last January, following our annual IMPACT Luncheon, I began characterizing our economy as utopia, with 5.5% GDP growth, 3.9% population growth, 4.9% unemployment, $95 price of oil. The Edmonton economy was on fire and the Conference Board of Canada was predicting 4.9% GDP growth for Edmonton in 2014, and the top performing city in the country for 2015, 2016, 2017 and 2018.

We were not as optimistic at EEDC. We worried that the market was overpriced. We became concerned about governments thinking 3.9% population growth would last forever. We were closely watching the surge in supply of tight oil out of the US at the expense of Saudi Arabia losing market share. We felt the Alberta economy was becoming overheated with labour costs reaching all-time highs. And we were most troubled about social unrest because of the unemployed youth in the east, throughout the US and around the world.

We launched a scenario planning initiative with the help of Incite Marketing to come up with a document that hopefully encouraged the business community to start thinking that the current economic environment, utopia, may in fact change and change quite quickly. Although published in May, I have attached this EEDC document here for your use and benefit.

Geopolitics of Oil

In 2008, the price of oil plummeted from $140 to $40 in a matter of six months – a $100 drop. It was driven by a financial crisis. Bear Stearns collapsed in March 2008 and Lehman Brothers then collapsed in September. Banks refused to honor each other’s credit, shipping and trade halted, and tankers full of oil were stranded in oceans without the ability to dock. It was a totally different situation than today.

Today, oil has plummeted from $105.93 to $50.46 in the past eight months – a $55 drop. It has been driven by a geopolitical agenda of OPEC states (specifically Saudi Arabia) in direct defense of its market share in the United States, and with the goal of putting highly-leveraged and high marginal-cost producers around the world out of business.

Who are those? The US has drilled >20,000 new wells in the last 4 years. They now product 9Mb/d vs 10Mb/d in Saudi Arabia. Most of those shale oil companies are highly leveraged and in need of cash flow. As prices have declined, it now costs more to develop new wells than they are making on existing ones, which is unsustainable, and the low prices will start to squeeze many highly-leveraged producers out.

And who are the high marginal-cost producers? Venezuela is the highest and dangerously close to defaulting on its debt. Nigeria has had to raise interest rates and devalue its currency, as has Russia. Iran is a high cost producer flirting with economic and political unrest. And Brazil offshore and Canada’s oil sands operators are next in line of the highest marginal cost producers.

With Venezuela, Nigeria, Iran, United Emirates, Algeria and Kuwait all high cost OPEC states, the Saudi’s who are in charge need to walk a careful line such that their quest for market share doesn’t create war in the Middle East or an overthrow of power in Russia. If either of those events happen, the price of oil could soar, and we’re seeing anticipation of that this week and in the markets over the past 45 days.

Response by Alberta

When we look at our scenarios, a $50 price of oil regardless of global expansion/contraction is a tough scenario for the Government of Alberta. Our provincial government will move into cost containment mode (program cuts and salary rollbacks) and hopefully make incremental vs. drastic changes to their fiscal framework – something that is desperately overdue. Capital expenditures will be reduced but funded through deficits, as they have learned their lesson of the Klein years and understand that they the need to invest in infrastructure otherwise burden future generations. These are unpopular but essential moves, as Alberta needs to create stability in its financial model in order to provide long-term, sustainable funding to essential programs in the years ahead.

We live in a province that has been consistently out of balance. We have an energy strategy and an energy funding strategy. That is it. Our post-secondary strategy, our healthcare strategy, our diversification strategy, out budgeting strategy has proven that it cannot withstand a -20% change in the price of oil … and that is detrimental to the long-term health of our economy, our people and our communities.

I sympathize with our Premier who has inherited this problem of revenue volatility, as these are the same problem as we experienced in the 1980s, the 1990, the 2000s and now in 2015. And it will be the same volatility problem that we will experience in the 2020s, 2030s and 2040s unless we take action and show the political leadership necessary to make incremental changes to our tax structure, our savings policies, our discipline around expenditure growth, and our transparency around financial reporting such that the public can understand our financial situation and support him in making the tough decisions.

Impact on Business

There is a range of perspectives on what this will mean for business, from the Conference Board’s prediction of a recession to local predictions that we will weather through similar to 2009-2010. Given no one can accurately predict the price of oil or geopolitical stability, I would encourage business to focus on the reality that has emerged:

  1. We are in a provincial budget crunch and a global competitiveness crunch.
  2. Operating costs in the oil service sector are up 50% over the past 5 years with wage inflation running around 6% per year. This has created an overheated sector that is in need of correction.
  3. Capital expenditures are looking to be down 30%-35% in conventional energy business.
  4. Capital expenditures are looking to be down 15%-20% in the oil sands business.
  5. Layoffs have started, and we are anticipating the corporate sector will eliminate 25,000 – 30,000 jobs in 2015. This will impact out-of-province workers in northern Alberta and approximately 20,000 families and high paying jobs (mostly in the Calgary area) in the coming year.
  6. Our provincial unemployment rate will rise to 6.5%-7.0% which will have a socio-economic impact on our major cities, but will be felt to a much greater extent in southern Alberta.
  7. Household incomes will remain flat, but still at quite a relatively high level of disposable income.
  8. Household and personal debt will get concerning as rates flirt with rising in late 2015.
  9. Canadian dollar will continue to follow the price of oil, resulting in a boom in tourism and our export industries (forestry, agriculture, manufacturing, etc.) will expand with US/Global growth.
  10. $4 Billion of new construction in Edmonton’s downtown will go ahead as planned, as most projects are well underway and will continue through 2015-2016.

I know I am supposed to be the booster of our city and economy, but I am also a realist and I care deeply about the long-term success of our local businesses and the financial health of our families. My suggestion is that we should get used to this level of oil pricing at $50, but prepare budgets for $40 oil. This may sound lower than what you are hearing by most economists, but I was trained to always budget for reality and adapt to an optimistic environment, as opposed to having to do it the other way around.

So What Can You Do?

Given “hope” is not sound strategy, there are a few things we can all do to prepare ourselves and our businesses accordingly. You can take or dismiss these as you wish:

  1. Focus on your balance sheet, be it corporate or personal, and develop a plan that you can share with your bankers, accountants and other professionals in a proactive manner.
  2. Communicate openly with your employees and family about the situation. Reset their expectations and involve them in the level of preparedness that needs to be taken by everyone.
  3. Re-forecast with an understanding that population growth and income levels will remain flat.
  4. Those with strong balance sheets should be looking for opportunities and acquisitions.
  5. Those with high cost structures should address systemic and productivity issues with their business models.
  6. Advocate openly for the need to make incremental changes to our tax structure, which are needed, as our elected officials need the courage to do the right thing.

A Bright Future

National messaging about our province has been much bleaker than required. Yes, we need to: (1) Establish discipline around our expenditure growth; (2) Make incremental changes to our tax structure; (3) Institute a de-politicized savings/investment policy; and (4) Establish transparency around financial reporting such that the public can understand our financial situation and support the Premier in making the tough decisions. But the message must go further.

We need to communicate “why” we are doing this and not just running massive deficits like other jurisdictions. Our message needs to also say that “Alberta is committed to implementing these four steps over the next 2.5 years, and once we do this, our province will be: (1) Still the most tax advantaged jurisdiction in North America; (2) Blessed with an abundance of energy, food, fibre and materials that the world demands; (3) Armed with the strongest and smartest labour force of 18-36 year olds that now understand what it takes to be competitive; and (4) Filled with Canada’s best managed companies with solid business models and diversified markets that outperform whether the price of oil is $140 or $40.

Our message to the world, and to Albertans, needs always to be aspirational – we know the changes that we need to make, and then look out because before you know it, Alberta will be back out front leading the nation, bigger and stronger and more competitive, like we have been consistently over the past fifteen years.

We have work to do. Let’s make the changes. And then let’s get the plan underway.