Former prime minister Stephen Harper delivers the keynote address at a conference in Ottawa, on March 22.Adrian Wyld
Steven Globerman is a senior fellow and Tegan Hill is director of Alberta policy at the Fraser Institute.
Alberta Finance Minister Nate Horner on Wednesday officially appointed a new board of directors for AIMCo, the $169-billion asset manager that handles the Alberta Heritage Savings Trust Fund and several public pensions including the Alberta Teachers’ Retirement Fund. Premier Danielle Smith’s government had fired the previous board earlier this month to “reset the investment corporation’s focus.”
The new appointees include the Smith government’s own deputy minister of finance and former prime minister Stephen Harper as chair. Indeed, the provincial government will now have a permanent representative on the board; this is a stark departure from past AIMCo boards, which have operated independently from government since 2009, a year after AIMCo was created.
Clearly, the Smith government’s overhaul could pave the way for more government control of AIMCo activities. Perhaps Albertans shouldn’t be surprised. Just a few months ago, Ms. Smith said she might use income from the Heritage Fund – managed by AIMCo – to “assist in de-risking projects” in the oil and gas sector (in other words, funding projects that can’t secure financing from private lenders).
Any such interventions by the provincial government would be bad news for Albertans invested in AIMCo’s funds, particularly if the government’s goal is to increase the fund’s share of assets invested in specific Alberta companies, projects or industries – including the oil and gas sector. Here’s why.
For starters, politicians and bureaucrats are not omniscient. While private investment managers are also imperfect, they are presumably more adept at investment strategies than government officials. If specific investments in the province promised above-average risk-adjusted returns, AIMCo’s independent investment managers would likely make those investments without the advice or direction of government. Thus, government-directed investments are necessarily in those projects likely yielding lower returns (risk-adjusted).
Secondly, the incentives of private investment managers are closely aligned with those of their investors, as the compensation of investment managers is typically linked to the returns earned by investors. Conversely, politicians and political parties are primarily concerned with winning elections and staying in power.
To do so, politicians promise benefits to certain voters to gain their support, which may not align with the best interests of AIMCo’s investors. If the government uses AIMCo pension-fund assets to make investments in the province to win political support – at the expense of reduced investment returns of the pension fund – AIMCo investors will effectively subsidize other Albertans who have not put their savings at risk.
Put differently, if the priority of AIMCo – to maximize risk-adjusted returns for its investors – becomes subordinate to the government’s attempt to woo specific voters, the likely result will be an inefficient allocation of capital in the eyes of AIMCo investors.
To be sure, some Albertans will likely benefit from AIMCo investments directed by the government to local companies or select industries in the province. For example, if you work for an oil company and the government mandates that AIMCo invest more of its funds in the oil industry, you may benefit from a job promotion with increased compensation. However, the expanded hiring and increased growth of your local company (and other oil companies) will likely be accompanied by reduced hiring and slower growth in other local companies and sectors that did not receive government-directed investment.
Put differently, as non-financial inputs (e.g. labour and physical capital) shift from one set of companies to another and to the extent that the government-favoured companies are less productive on average than other local companies (a reasonable assumption – otherwise the private market would already be allocating capital to them), the reallocation will result in an overall decline in productivity, as the government’s investment priorities are dictated by political considerations – not by investment return and productivity concerns.
Put differently, if AIMCo investors bear the cost of government-directed investment strategies, while other Albertans enjoy indirect benefits (e.g. higher salaries), the government’s AIMCo strategy would amount to an indirect and unlegislated effective tax increase on one set of Albertans to benefit another set.
As the AIMCo shakeup continues, Albertans should keep a close eye on the Smith government. Albertans invested in AIMCo funds would pay a price for any government-led efforts to direct more investment to specific companies or industrial sectors in the province. Government involvement in AIMCo might also hurt the provincial economy.