Thursday, August 16, 2007

Canada: Dodging corruption in Alberta

Anyone who watched the fiasco of the Gomery Commission unfold in Quebec should know that Canadian politics are not immune to bribery and corruption. In its wake, federal politicans tightened electoral laws -- better late than never. Now it's time to use foresight, not hindsight.

No political system in Canada is as ripe for corruption as Alberta's. Oil companies face enormous financial incentives to bribe politicians in order to shape policy, yet Alberta's political transparency laws are from the Dark Ages. It's time to do something about it.

I am not casting personal accusations. The reason I think Alberta is ripe for corruption is based on economics and a realistic view of human nature. But the economics tell a compelling story.

Alberta is a booming province, and this is basically wonderful. But a boom economy comes with various dangers that have to be managed carefully. One of the hidden dangers is the financial incentive for what political scientists call "capture": when politicians and senior bureaucrats fall into the pockets of private interests. In Alberta, there's every reason to think that it is more cost-effective for oil companies to pay politicians to avoid unfavorable tax treatment than it is to actually pay the taxes.

Consider the money involved. Currently, oil companies pay Alberta a royalty of either 1% of gross revenues or a quarter of net profits for oil sands operations, whichever is more. By global standards, this is a low rate. Moreover, it has stayed low even as oil prices have risen in the last 5 years, and other jurisdictions from Venezuela to Norway are raising their rates. Canadian companies justify the royalty rate based on the risk they took by investing in the oil sands in the 1990s, when oil prices were low.

Yet now there is a huge financial incentive to avoid an increase in the royalty rate in the oil sands. At present, the Canadian Association of Petroleum Producers says the industry pays Alberta about $1 billion (2005), up from $0.2 billion in 2003. Still, it could go a lot higher. If total output from the oil sands is about 1 million barrels per day and oil prices average about US$60 per barrel, then increasing the royalty rate from 1% to 10% is worth at least $2 billion dollars each year to the Alberta government.

Compare that sum of money to the kind of money raised by Canadian politicans in elections and leadership campaigns. When Stephen Dion won the 2006 Liberal Party leadership, he raised $1.8 million. In other words, the annual cost of a potential increase in the oil sands royalty rate for oil companies is 1000 times bigger than the entire campaign fund for the leadership winner of the biggest party in Canada.

We know this because there are laws regulating federal party leadership contests. Alas, there are no such rules in Alberta. At the federal level, Parliament also passed a law in 2003 that banned parties from accepting campaign contributions from corporations. Some provinces, like Ontario, have a cap on corporate contributions. Again, no such law in Alberta.

Now put yourself in the shoes of an oil company executive. If you knew that an increase in the tax and royalty system in Alberta would cost your company billions of dollars over time, what would you do to avoid such a change? It just makes sense that you would want to befriend the politicans in power. And when they asked you for a contribution to their political campaign, of course you'd be willing to help out.

The trouble is that once you walk down this road, you wouldn't have to be a monster to consider ways to get around any of those pesky rules that limit political contributions. Of course, in Alberta, you wouldn't have to. Why? Because they're aren't any.

I'm not saying oil companies have actually bribed anyone. I'm saying that bribery probably isn't necessary. That's because in Alberta, undisclosed contributions to party leadership campaigns are all perfectly legal. So when Ed Stelmach ran for the Conservative leadership in 2006, no one outside of his campaign team knew who his funders were. We still don't know.

Maybe nothing shady is going on. But it just makes good sense to make sure it doesn't.

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