By Tegan Hill and Steven Globerman

As part of its new plan to grow Alberta’s Heritage Fund to $250 billion by 2050, Danielle Smith’s government has created the Heritage Fund Opportunities Corporation (HFOC), which will manage new investments the fund makes. But Albertans should be wary. If this new asset manager prioritizes political goals over investment returns, they will pay the price.

Alberta created the Heritage Fund in 1976 to save a share of the province’s non-renewable resource revenue, including from oil and gas. Due to poor management by successive governments, the fund’s projected value is just plan this fiscal year — less than its value in 1985-86 after adjusting for inflation. The Smith government wants to grow the fund to help stabilize government finances, given inevitable fluctuations in economic conditions and resource prices, and to share wealth across generations of Albertans.

As mentioned, the new manager, the HFOC, will oversee new investments, while existing ones remain with AIMCo (the Alberta Investment Management Corporation). wants to the government, while the HFOC will provide top-tier investment performance for Albertans, the changeover is “about more than generating financial returns — it’s about creating a lasting and positive impact for the province as a whole,” with a “strong focus on opportunities that maximize growth while supporting areas that matter to Albertans, such as technology, energy and infrastructure.”

That suggests factors other than a desire to maximize risk-adjusted returns will determine the HFOC’s investment choices. That’s a problem. From the 1970s to the early 1990s, the government became more actively involved in directing economic development by, for example, providing financial assistance to companies and projects funded by the Heritage Fund. Ultimately, Alberta taxpayers lost more than $2 billion from failed loans, guarantees and share purchases in specific projects favoured by the government.

If the government’s interests override the goal of maximizing risk-adjusted returns, political considerations will at times trump investment considerations. This is why many successful sovereign wealth funds — that is, funds owned by governments — have rules prohibiting domestic investments and political interference in investment decisions.

The point is often made that politicians and bureaucrats are not omniscient, far from it. Neither, of course, are private investment managers. But private asset managers are still likely to get a better rate of return than government officials operating in a politicized environment. Politicians are primarily concerned with winning elections and staying in power, which means they promote the interests of specific groups of voters to gain their support.

If the HFOC prioritizes the Alberta government’s economic development agenda over the investment performance of the Heritage Fund and makes investment decisions based on political priorities, it will hurt the performance of the Heritage Fund and reduce its value. As a result, Albertans will remain on the resource-revenue rollercoaster, and if (or when) resource revenues go into permanent decline, they will likely face significantly higher taxes to pay for their government programs and services.

If the Smith government truly wants to maximize returns for Albertans and grow the Heritage Fund to $250 billion by 2050, it should stay out of the fund’s investment decisions.

Tegan Hill is director of Alberta policy at the Fraser Institute, where Steven Globerman is a senior fellow.

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