Bringing Alberta’s waning economy back to life

Many of the Alberta economy's best new ideas can't get off the ground for lack of sufficient support from the province and its investors

alberta economyEDMONTON, Alta. July 19, 2016/ Troy Media/ – It’s time to kick-start Alberta’s economy with an aggressive new perspective on funding small and medium-sized businesses.

Alberta’s economy has entered its deepest recession since the 1930s. A recent report from economists at the TD Bank predicts that the province’s economy will shrink another three per cent in 2016. That will bring the accumulated decline in Alberta’s output to 6.5 per cent since the current recession started in 2014.

The report paints a bleak picture. It forecasts further declines in house prices, nominal gross domestic product (GDP) and personal disposable income. It also sees a near collapse in corporate profits. And it’s all brought about by the 67 per cent decline in the price of oil in the past two years.

“The recession in Alberta will be its worst in at least three decades and will be among its longest as well,” the report says. TD forecasts that the recession will continue well into 2017, but – somewhat surprisingly – the bank remains confident about the province’s long-term prospects.

The authors made note of Alberta’s relatively young and highly-educated workforce, and reminded everyone that there is still a lot of wealth in Alberta. The report concludes on a hopeful note: “Based on Alberta’s track record and comparative strengths, we remain confident in the province’s ability to successfully overcome the barriers erected in its path.”

But they are significant barriers. The collapse in oil prices has knocked about $60 billion out of the province’s annual GDP. Replacing that will be major challenge.

For any optimistic future to be realized, a few hard truths will need to be faced, beginning with a wake-up call on the structure of Alberta’s economy, which is clearly overdependent on the volatile oil and gas industry.

The heart of the problem would seem to be structural. Capital markets in Alberta are designed to funnel investment toward energy projects, as well as the province’s housing and commercial real estate sectors. With all of these failing or stagnating, the challenge is to redirect capital toward more productive sectors – technology, for instance.

There are movements afoot to accomplish this. Two public financial institutions, provincially-owned ATB Financial and the federally-owned Business Development Bank of Canada, have agreed to work together to help kick-start the economy. They’ve launched a $1-billion initiative to invest in small to medium-sized businesses in Alberta.

However, before these funds can make a significant improvement in the province’s economy, changes will have to be made to traditional banking systems, processes and protocols.

In truth, there has never been a shortage of bank capital or loan facilities for small businesses in Alberta. But the banks’ record of supporting companies in need has been dismal. The reasons for this are predictable: early-stage development businesses, as a rule, don’t have sufficient cash flow to support a loan, nor do they have traditional collateral to use as security.

Why?

Most of Alberta’s best growth opportunities are technology-based. So these new companies are developing intangible assets (patented inventions, copyright software and/or services). Alberta’s financial infrastructure, like most of the western world’s, has not developed protocols to recognize and properly collateralize these new asset classes. And Canada’s tax laws encourage companies to write off their intangible assets, meaning they have no assets to show a bank.

So various sectors of the Alberta economy, including the technology sector, are undercapitalized and therefore underperforming in the market. And we need to build our future economy around these sectors.

Mind you, as the report indicated, other private sources of capital could help the technology sector.

Albertans have great wealth, but it’s socked away in managed investment accounts that can’t or won’t invest in local businesses. As a result, billions of dollars a month in managed investments (RRSPs, TSFAs, pension and mutual funds) leave Alberta to be invested elsewhere.

If the Alberta government is serious about helping, it could help redirect some of this managed capital to local businesses. It could also encourage Albertans to direct some of their RRSP or TSFA investments to companies needing capital to build new products, hire staff and grow their businesses.

This simple formula will help diversify the Alberta economy.

Troy Media columnist Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert is also included in Troy Media’s Unlimited Access subscription plan.

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