Conservatives for Higher Potash Royalties

Growing up in Saskatchewan, I never imagined myself blogging in praise of Rick Swenson. First, blogs did not exist then. Second, I generally disagreed with Swenson, a former cabinet minister in Grant Devine’s Progressive Conservative government.

Swenson is back as leader of the provincial Progressive Conservative party, whose caucus quit to join with right-wing Liberals and federal Reformers to create the Saskatchewan Party in 1997. This morning’s newspapers report:

Tory Leader Rick Swenson said the existing [potash royalty] structure must be changed to “ensure that the owners of resources – the people of Saskatchewan – get their fair share of the resource pie and for the decoupling of new mine and expansion construction from potash tonnage produced.”

. . .

Swenson, a former energy minister under Grant Devine, said that government privatized Potash Corp. of Saskatchewan to ensure that taxpayers weren’t paying for mine expansions but that it has continued to occur under NDP and Sask. Party governments.

Swenson made similar comments on John Gormley’s radio show last Friday. This development will surprise many in Saskatchewan, where resource companies and compliant governments have portrayed any discussion of higher royalties as wild-eyed leftism.

Swenson reminds us that there is nothing ideological about the government charging the full market value for assets that it sells. For natural resources, the price should equal economic rent, a concept articulated by David Ricardo (hardly a wild-eyed leftist).

But Saskatchewan’s supposed champions of free enterprise – Gormley, Johnstone, the Saskatchewan Party – want to continue subsidizing potash companies by giving them the resource for less than it is worth.

When PotashCorp was a Crown corporation, the public had to take on some costs but also got an ironclad claim to all future economic rent. That arrangement made sense and Swenson was wrong to undo it.

However, his characterization of the post-2003 arrangement is right. Saskatchewan taxpayers bear much of the cost of investment through inflated write-offs and royalty holidays, while the potash companies get to keep most of the economic rent.

If we want private companies to mine the potash, we must allow them an adequate rate of return. Royalties should be structured to collect the economic rent in excess of normal profits. Designing royalties to achieve this goal may be a technical challenge, but the goal itself should not be politically controversial.