Alberta’s quest for diversification gets much-needed lift
On the same day a $3.5-billion petrochemical plant was given the green light in Alberta, city council approved a $100-million economic development investment fund.
These two events are unrelated, yet a common thread connects them: Alberta’s quest for diversification and willingness to use incentives to turn this economic dream into hard reality.
Since the bottom fell out of Alberta’s energy sector in 2014, civic and provincial officials have been hunting for new ways to grow the economy.
Diversification has become a daily mantra for governments trying to create jobs and broaden the tax base.
On Monday, Alberta saw these two points intersect with Calgary-based Inter Pipeline Ltd. making a positive final investment decision on a new $3.5-billion petrochemical facility northeast of Edmonton.
The propane dehydrogenation and polypropylene complex in Strathcona County will be the first of its kind in Canada. It is expected to generate 13,000 direct and indirect jobs, and 180 full-time positions once it starts operating in late 2021.
But its importance extends beyond jobs.
The Heartland Petrochemical Complex will convert 22,000 barrels a day of propane into 525,000 tonnes of polypropylene annually.
With the explosion of shale gas drilling in Canada, Alberta is awash in propane, giving the project a competitive advantage by being able to buy low-cost feedstock and turn it into a higher-value product.
Polypropylene, which is the largest single plastic globally, can be turned into moulded auto parts, containers, textiles and medical supplies, among other uses.
Global demand for polypropylene is surging, expected to increase by 25 per cent between 2016 and 2021, according to IHS Markit.
Yet, Canada doesn’t produce polypropylene today.
Once construction is complete, some product will stay in Canada, displacing imports. Inter Pipeline will produce pellets that can be transported by rail into other markets, such as the U.S. Midwest.
“It’s almost four times the value of propane, so it’s adding a lot of value to our raw resources,” said Inter Pipeline senior vicepresident David Chappell.
“This will change Canada’s trade balance a bit, too, because rather than buying high-value products, now we’re producing the high-value products here.”
Alberta already has a wellestablished petrochemical industry, but this announcement moves the province into a new value chain with room to grow.
The petrochemical sector has faced higher costs to build in Alberta than in competing jurisdictions like the U.S. Gulf Coast.
To change that dynamic, the Alberta government is providing $200 million in royalty tax credits to the company, which it will only receive once the plant is operating.
The idea of Alberta offering incentives to companies remains contentious, however, given the history of failed investments and white elephants that date back to the 1970s and ’80s.
Energy Minister Marg McCuaig-Boyd said the royalty tax credit program simply puts the province on a competitive playing field due to the higher capital costs to build here.
To “attract the investment to Alberta, maybe a little bit of incentive is needed,” she said. “It’s just one little thing that helps push it over the line.”
Monday’s announcement is a big win for the petrochemical sector and the government, which announced its royalty tax credit program more than a year ago.
INHERENT RISK
However, there is an inherent risk whenever governments get into the tempting game of offering incentives to chase business.
Former Alberta finance minister Ted Morton, who has studied past diversification efforts, said the province has frequently lost public money chasing industries where it lacks expertise.
“The track record is very poor. Governments pick a lot more losers than winners,” he added.
That said, Morton believes the royalty tax credit model has previously worked well in the petrochemical sectors and can be a worthwhile investment — if it’s structured properly.
And that brings us to Calgary city council.
On Monday afternoon, councillors voted in favour of putting $90 million into an economic development investment fund, using city reserves to increase its total value to $100 million.
The fund aims to diversify the economy, create jobs, support ways to reduce the downtown office vacancy rate and help local companies expand.
In other cities with similar investment pools, public money has gone into enticing corporate headquarters to relocate, to fund business park developments and move post-secondary institutions into the downtown.
Veteran Calgary oilman Jim Gray, who is on the fund’s steering committee, said disruptive changes from technology and the digital economy are affecting the foundational industries of the city.
“We need to move urgently on this. It is truly an all-hands-ondeck moment in our economic history,” Gray said.
Calgary Economic Development will be responsible for taking in all of the opportunities under consideration, with potential investments reviewed by the agency and a third party.
Many of the big questions that will determine its success — such as the fund’s terms of reference and the governance model needed to prevent political meddling — are still under development.
They will be completed early next year.
While the details are being hammered out, economist Ron Kneebone at the University of Calgary is wary about using any taxpayer money to entice companies to the city.
He’d rather see council set its tax rates lower to be competitive than offer incentives or subsidies.
“It’s a dangerous game because it encourages other municipalities to start doing the same thing,” he said.
Both the province and Calgary have decided to move down the same path, becoming aggressive to pursue economic diversification, investment and jobs.
After decades of simply waiting for businesses to come knocking on Alberta’s door, the game has changed.
And if the public chequebook is now open, so are the expectations that all sides will be able to deliver.