The State as Financier: A Comparison of the Caisse de dépôt et placement du Québec and Alberta...

Canadian Public Policy

The State as Financier: A Comparison of the Caisse de dépôt et placement du Québec andAlberta Heritage Savings Trust FundAuthor(s): Stephen BrooksSource: Canadian Public Policy / Analyse de Politiques, Vol. 13, No. 3 (Sep., 1987), pp. 318-329Published by: University of Toronto Press on behalf of Canadian Public PolicyStable URL: http://www.jstor.org/stable/3550908 .

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The State as Financier: A Comparison of the Caisse de depot et placement du

Quebec and Alberta Heritage Savings Trust Fund STEPHEN BROOKS* Department of Political Science University of Windsor

La dernitre decennie a ete marquee par la croissance dramatique dans le role des organismes d'investissement 6tatique comme source d'emprunts pour les gouvernements provinciaux au Canada, ainsi que comme source d'emprunts et de capital action pour les entreprises du secteur prive. Parmi ces sources de capitaux etatiques la Caisse de dpo6t et placement du Qu6bec et le Alberta Heritage Savings Trust Fund sont les plus importants. Cet article compare ces deux organismes d'investissement etatique, et certaines des implications politiques et economiques de leurs activit6s. Nous examinons en particulier les questions suivantes: 1) leurs origines et objectifs politiques; 2) la relation entre leurs politiques d'investissement et le d6veloppement economique provincial; et 3) leurs performances financieres.

The last decade has seen dramatic growth in the role of state investment agencies as a source of debt capital for provincial governments in Canada, and of both debt and equity capital for private sector firms. Among these pools of state capital the Caisse de depot et placement du Quebec and the Alberta Heritage Savings Trust Fund are the most prominent. This paper compares these two state investment agencies, and some of the political and economic implications of their activities. The following specific issues are adressed: 1) their origins and policy objectives; 2) the relationship of their investment behaviour to provincial economic development; and 3) their financial performance.

I Introduction

tate financing of private sector economic activity is not a recent development. Mussolini's

1933 nationalization of several failed banks through the creation of Italy's Instituto per la Recostruzione Industriale (IRI), marked the

unplanned entry of the Italian state into the financial sector. In France, 70 per cent of that nation's credit was nationalized with the 1945 takeover of the four largest savings banks: Banque Nationale pour le Commerce et l'Indus- trie, Comptoir National d'Escompte, Credit Lyonnais, et la Societe Generale. Extensive involvement in banking and insurance companies by the federal, regional and local governments was well established in West Germany by the 1950s. In Canada, a significant state pres-

ence in the financial sector is of more recent origin and mainly has assumed the form of specialized credit agencies and investment funds,1 rather than banks in competition with private sector counterparts.

The last decade has seen dramatic growth in the role of state investment agencies as a source of debt capital for provincial governments in Canada, and of both debt and equity capital for private sector firms. Among these pools of state capital the Caisse de depot et placement du Quebec and the Alberta Heritage Savings Trust Fund (AHSTF) are the most prominent, ranking eighth and twelfth, respectively, among Cana- dian financial institutions. Indeed, the Caisse is the single largest equity investor in the Canadian economy, and is the largest shareholder in several of the country's foremost corporations.

Canadian Public Policy - Analyse de Politiques, XIII:3:318-329 1987 Printed in Canada/Imprime au Canada



Despite the rapid growth of these pools of state capital, they still account for only a small share of the total business financing market in Canada. At the end of 1984, the assets of the Caisse amounted to only 6 per cent of the combined assets of Canada's five largest banks (with combined assets of Can. $338.3 billion), while those of the AHSTF were 4.3 per cent of this amount.2 Nonetheless, their capacity for strate- gic interventions has been important, this being particularly true of the Caisse, and their growth has spawned a number of studies examining the financial and political implications of their activities.3

This paper compares these two state investment agencies, and the political and economic implications of their activities. The following specific issues are addressed: 1) their origins and policy objectives; 2) the relationship of their investment behaviour to provincial economic development; and 3) their financial performance, including a comparison to the private sector.

II Origins and Policy Objectives

The Caisse de ddpot et placement du Quebec Established in 1965, the Caisse was the agency through which contributions collected under the Quebec Pension Plan (QPP) would be invested. The provincial government of Jean Lesage had taken the decision to establish the QPP separately from the Canada Pension Plan participated in by all the other provinces, in recognition of the importance of this capital pool for financing both provincially-centred economic development and expansion of the Quebec state. The decision to establish both the Regie des rentes to administer the QPP, and the Caisse to invest the savings collected under the plan, is most plausibly understood as an investment in nationalism. There were obvious financial costs involved in the creation of a new and separate bureaucracy to administer the QPP and invest the pension fund. However, the decision carried a number of clear political advantages, including the assertion of provincial dominance in this area of social policy, de facto recognition of Quebec's special status within Canadian federalism, and autonomous control over the development of

the pension plan and the terms regulating the disposition of the fund. These advantages ac- crued primarily to the government of the province, in its competition with Ottawa over the levers of social and economic policy, and to the francophone new middle class which would benefit both directly, from the managerial posi- tions created by the Regie des rentes and the Caisse, and indirectly through the state expansion which investments of the Caisse would finance.

The contribution which the Caisse would make to the social and economic development of the province was not expected to stop at under- writing state expansion.4 Examination of the Caisse's origins and subsequent assessments of the agency's role reveal a broad area in which the Caisse is free, within the limits imposed by management's fiduciary responsibility, to invest directly in private sector firms with an eye to provincial economic development. While the Caisse is not precluded from direct investment in corporations without significant Quebec operations (nor even from investing in non-Canadian equity, although there is a 10 per cent ceiling on the proportion of the Caisse's total assets which may be invested in foreign securities), there always has been a clear expectation that priority would be accorded 'Quebec' corporations.

An examination of the statutory provisions regulating the investment policy of the Caisse provides some indication of the expectations which the Lesage government had for this crown agency. The charter sets out three main classes of investment, namely: i) government bonds and the government-backed issues of public authorities; ii) fully-secured instruments in the private sector; and iii) equity holdings. With the excep- tion of limiting conditions regarding the purchase of school board and municipal bonds in Quebec (s.26), investment in government bonds and the issues of public authorities is without restriction on either value or debtor. While the government acknowledged that financing the Quebec state was to be an important function of the Caisse, investment in the bonds of other governments and public authorities, whether in Canada or abroad, was anticipated. With respect to the bonds of private corporations, the charter of the Caisse stipulates a 1 per cent limitation on

The State as Financier 319



the total investment of the fund in any single corporation, as well as requiring a proof of security (for example, if the bonds are secured by privileged claim on property, or by a proven financial track record). However, there is no limitation on either the absolute value or proportion of the Caisse's assets which may be held as corporate bonds. The most restrictive conditions obtain in the case of equity investments. These conditions include the requirement that a corporation whose shares are purchased by the Caisse must have yielded at least a 4 per cent annual return on common shares in each of the preced- ing five years, and that the Caisse may not hold more than 30 per cent of the equity of any single corporation, nor may more than 30 per cent of its total assets be invested in equity.5

The fundamental tension which emerges from a review of the expectations held for the Caisse is between the fiduciary responsibility of the Caisse as the investor of state-mandated savings, and its role in supporting economic development in the province. While there is no necessary contradiction between these two sets of expectations, particular decisions taken by the Caisse during the last several years (for example, lending money to Hydro-Quebec and the Quebec government at below-market rates; acquiring, in concert with the Societe generale de finance- ment, controlling interest in Domtar, one of the largest firms operating in Quebec; and seeking representation on the boards of directors of corporations in which the Caisse holds a large ownership share) have raised questions about the proper balance between these roles, and about the relationship of the Caisse's management to the government of the day. Because it is silent on such matters as the inter-sectoral distribution of equity investments, what constitutes acceptable participation in the affairs of a holding, and what the relationship may or ought to be between the Caisse and Quebec's state enterprise sector, the Caisse's charter provides little guidance in as- sessing the extent to which the recent operating history of the Caisse accords with the expectations of its founders.

However, the legislative record is informative in revealing that the Caisse was not expected to be a passive investment agency, operating as would a private pension fund. Indeed, it is

difficult to overstate the expectations which were held for the Caisse as an instrument of economic nationalism. As the major francophone- controlled fund of investment capital in the province, the Caisse would be situated at the confluence of the sectoral economic policies of the government of Quebec. Whatever formal co-ordination occurred between the government's economic policy objectives and the Caisse's investment behaviour would be achieved through the presence on the Caisse's board of directors of three associate (non-voting) members appointed by the government: the Deputy Minister of Finance, an officer of Hydro-Quebec, and a member of the Municipal Commission or an official from the Ministry of Municipal Affairs. This fell far short of co-ordination under an indicative economic planning regime and would eventually occasion criticism from the political left that the Caisse was too autonomous to operate as an effective instrument of economic policy.6

The Caisse's role as a vehicle whereby the collective savings of Quebec citizens would be channelled to finance public sector development and, simultaneously, reduce the political influence of the anglophone financial establishment in Quebec, particularly Ames Securities and the Bank of Montreal, was the most immediate expectation held by the provincial government in establishing this investment agency. The Caisse's massive purchases of Quebec government bonds issued in 1966, at a time when premier Daniel Johnson's '6galite ou ind6pen- dance' ultimatum had led to a boycott of the province's securities by the anglophone financial establishment, represented the first test of the agency's ability to increase the political latitude of the provincial government through reducing its dependence upon anglophone finance capital. The Caisse performed a similar stabilization function after the separatist Parti Qu6b6cois was elected in 1976, when private sector institutional investors once more were reluctant to purchase the province's securities. The significance of the Caisse in financing Quebec's public sector can hardly be overesti- mated. This is demonstrated in the proportion and absolute value of the Caisse's investments accounted for by bonds issued or guaranteed by

320 Stephen Brooks



the Quebec government and its agents, and other public sector organizations in the province. These have ranged from a high of 75.7 per cent of the total value of investments, or $144.6 million, in 1966 to 50.3 per cent, or just under $8 billion, in 1985.

However, the contribution which the Caisse would make to the social and economic development of the province was not expected to stop at financing state expansion. While the Caisse is not precluded from direct investment in corporations without significant Quebec operations, there always has been a clear expectation that priority would be accorded 'Quebec' corporations. In relation to the province's economic development, two main expectations have re- mained constant since the Caisse was established. These expectations are: 1) the Caisse will invest some portion of its capital in the bonds and shares of Quebec-based corporations, so that savings generated in the province contribute to expansion of the Quebec economy; and 2) assuming sound income prospects, the Caisse will participate in financing projects initiated by some other part of the state, or by the private sector.

The Alberta Heritage Savings Trust Fund Established in 1976, the Alberta Heritage Sav- ings Trust Fund (AHSTF) has become one of the foremost pools of investment capital in Canada, with assets of over Can. $14 billion. The rapid escalation in oil prices following the Arab embargo and the creation of OPEC, contributed to dramatic growth in the resource rents which the provincial government of Alberta reaped from oil production. Between 1973 and 1977 provincial oil revenue, including royalties, land sales and leasing fees, increased from Can. $516 million to $2.7 billion, presenting the Progres- sive Conservative government with the unusual dilemma of what to do with massive budget surpluses. At the same time, the explosive growth in Alberta's revenue presented a serious problem for the federal government. As part of intergovernmental financial arrangements the national government was required to transfer money to the less affluent provinces, sufficient to bring their per capita revenue up to the

average of the two most affluent provinces. Thus, Alberta's oil windfall had ramifications for fiscal federalism. Indeed, part of the lore of intergovernmental relations in Canada is that the idea of the AHSTF was suggested to Alberta's premier, Peter Lougheed, by prime minister Pierre Trudeau, as a means of 'sterilizing' this oil-based income.7

Starting with an initial capitalization of Can. $1.5 billion, the AHSTF Act originally provided that upon annual approval of the provincial legislature the Fund would be assigned 30 per cent of non-renewable resource revenue received by the province during the fiscal year.8 Since April 1, 1983, this allocation was reduced to 15 per cent, and in January of 1987 new contributions to the Fund were stopped. More- over, until the Act was amended in 1983, the AHSTF retained all income from the Fund's investments.

Like the Caisse, the investment behaviour of AHSTF is subject to several limiting conditions. Summarized, these are: 1) up to 20 per cent of the Fund's assets may be invested in capital projects intended to provide long term economic or social benefits, and which need not yield a competitive return; 2) an unlimited share of the Fund's assets may be invested in the debentures or equity of Alberta corporations, including provincial state enterprises; 3) an unlimited share of the Fund's assets may be devoted to energy investments in Canada; 4) up to 20 per cent of the Fund's assets may be used to make loans to other provincial governments or their agencies; 5) beginning in 1982, a Commercial Investment Division was established to make equity investments in Canadian corporations, with a limit of 5 per cent on the ownership share that the Fund may hold in any single corporation; and 6) funds not immediately required for other investment divisions of the AHSTF may be used to purchase marketable securities (for example, government bonds, treasury bills and promis- sory notes). Investments in categories (2) through (4) above are expected to yield a reasonable return, those in category (5) to yield a commercial return, and those in category (6) to earn a market return.




Clearly, the AHSTF is not a pool of risk capital. However, like the Caisse it is expected to promote provincial economic development, as is apparent from the statutory requirement that at least 65 per cent of the Fund's assets be invested in Alberta-based projects which 'will tend to strengthen and diversify the economy of Alberta'.9

Unlike the Caisse, investment decisions of the AHSTF are not insulated from the government of the day. Whereas the Caisse has an indepen- dent general manager and a board of directors appointed by the government, and cannot in law be issued directives by the cabinet, decisions of the AHSTF are taken directly by the provincial Treasurer and the cabinet. Notwithstanding the direct control which the Alberta government has over the investments of the Fund, as compared to the much greater autonomy of the Caisse's management, the behaviour of the AHSTF has occasioned comparatively little controversy.

Although the decline experienced by Alberta's energy dependent economy has not led to any significant rethinking of the AHSTF's relationship to business activity in the province, the reduced stream of petroleum revenue has led to important reforms in the Fund's relationship to provincial finances. Created in order to recycle the windfall revenue generated by increasing oil prices (a windfall that was aided by increased royalties charged by the provincial govern- ment10), the income earned on the Fund's investments now is used to offset the provincial budget deficit. The pattern of events that has led to this change is quite similar to that experienced by some of the member countries of OPEC. The dramatic increase in oil-generated income was used to finance investments in economic diversification, including a petrochemicals industry and the infrastructure of an expanding economy. When export markets began to soften and, eventually, the price of oil to fall, governments like those of Alberta and Venezuela found that the increased level of state spending acquired while 'sowing the oil'1 could no longer be financed by huge budget surpluses. Alberta's response to these changed conditions has involved three main reforms.

First, the annual 30 per cent allocation of oil revenue that was received by the Fund from its

creation was reduced to 15 per cent by a statutory amendment in 1983. The difference is received directly by the provincial treasury and therefore is used to fund provincial programs and to reduce the government's borrowing requirements. A second and related reform instituted in 1983 involved the transfer of the Fund's investment earnings to the province's general revenues, the rationale for which was the same as that for reducing the Fund's annual allocation of non- renewable resource revenue. This new role for the AHSTF, financing provincial expenditure, was envisaged at the Fund's creation.12 How- ever, since the 1982-83 financial year the annual reports of the AHSTF have laid much greater emphasis on the role of the Fund in financing provincial programs, to the point of designating this the major function of the AHSTF, whereas the provincial development and economic diversification goals were the foremost functions mentioned in previous years. In January of 1987 concern over the province's mounting budget deficit led the government to suspend new contributions to the Fund.

The third reform undertaken in consequence of the province's deteriorating economic situation was the indefinite suspension in March, 1982, of loans to other governments in Canada, or to the agents of these governments. By March 31, 1982, the value of these assets had reached $1.9 billion, with investments of $1.6 billion made through the Canada Investments Division between 1980 and 1982 (1982, $417.5 million; 1981, $563.3 million; 1980, $658.5 million). In addition to providing a secure market rate of return there is the possibility that the Alberta government saw these loans as investments in intergovernmental relations, collecting political obligations from other provincial governments that might prove useful as allies in Alberta's conflictual relationship with the federal government. One of the foremost students of Canadian federalism, Donald V. Smiley, has observed that the large purchases of bonds issued or guaranteed by the provincial governments of Manitoba, the four Atlantic provinces and Hydro-Quebec, led to speculation that the AHSTF might reduce the dependence of these provinces on the capital markets of the eastern United States.'3 This possibility was abruptly foreclosed in 1982, and

322 Stephen Brooks



no new purchases of the securities of other provinces have been made since then.

Summary The Caisse and the AHSTF were created out of very different political economic circumstances, the former as an instrument of economic nationalism during the Quiet Revolution and the latter as a means for reinvesting the provincial budget surpluses created by rapidly increasing prices for petroleum. Their relationship to the elected government and the statutory conditions regulating their investment behaviour are different in important respects, the Caisse having both greater formal automony in its decision-making and a larger capacity for equity investment. Despite these differences both the Caisse and the AHSTF have from the beginning been looked upon as instruments for provincial economic development, a policy objective which in each case was to co-exist with, rather than compro- mise, the agency's fiduciary responsibility to citizens of the province. Finally, while government's expectations for the Caisse have re- mained relatively unchanged since its creation, those for the AHSTF have been modified significantly over the past few years. Since 1983 the income from the Fund's investments has been used to finance provincial spending, and in recent annual reports this has been emphasized as the AHSTF's major policy function.

III Investment Behaviour and Provincial Economic Development

The Caisse In 1967 the Caisse began to invest in the shares of private sector corporations. Since then, equities have accounted for between 11.3 per cent (1967) and 28.8 per cent (1958) of the agency's total investments, while the dollar value of this portion of the Caisse's portfolio has increased from Can. $47,551,487 (1967) to the current value of $5,024.8 million (1985). Corporation bonds constitute another area of private sector investment by the Caisse. While the purchase of debt instruments does not carry ownership pre- rogatives, corporate bond issues generally are used to finance capital projects, and therefore an investment in bonds frequently will contribute

more directly to economic development than would the purchase of a corporation's shares. Corporation bonds comprised an important part of the Caisse's investment portfolio until the late 1970s. However, over the past several years they have accounted for a declining share of total investments, and the absolute value of the Caisse's private sector debt assets has fallen dramatically, from a high of $964.3 million in 1980 to $378.2 million in 1985.

Since 1982 the Caisse has published in its annual report a list of the private sector corporations in which the agency has investments in the form of shares and/or bonds. This information enables one to measure the extent to which the Caisse, through its investment behaviour, con- tributes to the financing of Quebec-based corporations. The operational definition of a Quebec- based corporation, as employed here,14 has two components: i) majority control is held by residents of Quebec; and ii) the corporation's head office is located in the province. 15

Examination of the Caisse's equity portfolio as of 31 December, 1985,16 reveals that under 20 per cent of the Caisse's total investment in corporate shares was accounted for by Quebec- based corporations. Shares in Domtar, Video- tron and Provigo together account for 5.7 per cent of the total value of the Caisse's equity portfolio, and approximately a third of the dollar value of all shares held in the Quebec-based corporations listed in the Caisse's annual report. In the case of corporate bonds, Quebec-based businesses constitute about 21 per cent of the value of those investments listed in the Caisse's 1985 breakdown. This should be viewed against the fact that 22 per cent of these aggregated investments is accounted for by the bonds of Bell Canada Enterprises, Campeau Corporation and Interprovincial Pipelines, three corporations that are not based in Quebec.

Review of the Caisse's shareholdings reveals that 92 per cent of the market value of the agency's equity portfolio is accounted for by shares held in 29 corporations, only three of which, Provigo, Vid6otron, and Brascade, generate the major part of corporate income from operations in Quebec. The latter corporation represents a partnership between the Caisse and Toronto capital (notably the Bronfman family




which, through Brascan Ltd., controls 70 per cent of Brascade) and does not satisfy the requirements of a Quebec-based corporation, as defined earlier.

The predominance of blue chip stocks in the Caisse's equity portfolio demonstrates that a competitive return on investment is the principal consideration determining the Caisse's direct investment behaviour. It was this phenomenon of heavy investment in the shares of non-Quebec corporations which led Pierre Fournier, a prominent Quebecois political scientist, to argue that the Caisse had contributed to the 'haemorrhage' of Quebec savings (Fournier, 1979:29,40). But in fact the size of the Quebec equity market represents a main limitation on the Caisse's purchase of shares in Quebec-based corporations. This was remarked upon several years ago by Marcel Cazavan, former president of the Caisse:

With regard to shares, Quebec corporations certainly are favoured. But the extent of the Caisse's purchases renders it impossible that these investments can be limited to Quebec without taking up everything that is issued. This would mean that the Caisse would take control of all Quebec corporations, which is neither allowed nor desirable (Fourier, 1979:31).

As of 1983, only 39 of the 175 largest Quebec-based corporations (a category which included state enterprises) were publicly traded on one or more Canadian stock exchanges. There were and remain, therefore, important limits on the pool of provincially-focussed enterprises in which the Caisse may invest directly. As for investment in non-Quebec corporations with substantial operations in the province, the federal government's introduction in 1982 of The Corporate Shareholding Limitation Act, legislation which proposed to restrict the capacity of provincial governments and their agents to invest in corporations with interprovincial or international transportation interests,17 demonstrated that anglophone capital was prepared to mobilize against the extension of Caisse ownership and influence. In the case of giant multina- tionals with operations in Quebec's manufactur- ing sector, corporations like General Motors, Ford Motor Company, and IBM, the size of the

investment which would be required to exercise influence as a shareholder precludes this possibility.

To summarize this section, the fact that a preponderance of the Caisse's private sector investments are placed in corporations with significant non-Quebec operations (and in some cases with no Quebec operations whatsoever) does not signify that the Caisse has failed to apply savings generated in the province to Quebec-centred economic development. The opportunities for direct investment in Quebec- based corporations are limited both in number and by the fact that the Caisse's role as fiduciary eliminates the possibility of the agency operating as a source of risk capital for businesses with uncertain prospects. Nonetheless, the Caisse does have important holdings in dozens of Quebec-based corporations.

The AHSTF Consistent with the expectations of the Progres- sive Conservative government which established the AHSTF, the preponderance of the Fund's investments have been in the Alberta economy. Infrastructural activities like communications, housing and financial services, and energy development projects have accounted for most of this provincial investment. Currently (31 March, 1985), 73 per cent of the Fund's assets of Can. $14,436 million is invested in Alberta. Table 1 provides a breakdown of the Fund's investments by region, over the operating history of the Fund.

Closer inspection reveals that 51.5 per cent of the Fund's Alberta investments is devoted to financing several provincial crown corporations. This supportive relationship to Alberta's extensive state enterprise sector has characterized the Fund from its inception. The average yield on these securities has been slightly less than the return that the Fund has earned on the debentures of other provinces and their agents, and those of private sector corporations,18 suggesting that the provincial development objective operates as a parameter within which a competitive rate of return on invested capital is pursued.

Compared to the Caisse, direct shareholdings in private sector corporations comprise only a small share of the AHSTF's assets; 5 per cent

324 Stephen Brooks



Table 1 Assets of the AHSTF by location, 1976-77 to 1984-85 (in millions of dollars)

1976- 1977- 1978- 1979- 1980- 1981- 1982- 1983- 1984- 1977 1978 1979 1980 1981 1982 1983 1984 1985

Location of assets Alberta-based* 1,612 2,409 3,422 3,873 5,509 7,670 9,788 10,239 10,537

(72.7) (71.4) (72.7) (60.3) (64.2) (69.7) (75.3) (74.7) (73.0) Elsewhere 606 965 1,283 2,542 3,070 3,339 3,214 3,473 3,899

Total assets 2,218 3,374 4,705 6,419 8,579 11,009 13,002 13,711 14,436

* The proportion of total assets invested in Alberta is indicated in parentheses. SOURCE: Compiled from data in Annual Reports of the AHSTF, 1976-77 to 1984-85.

($817.6 million) versus 22 percent ($6.8 billion) for the Caisse. Two of these, a 16.7 per cent shareholding in Syncrude and 37 per cent of the Alberta Energy Company, are managed under the Alberta Investment Division of the AHSTF. Despite the size of the Fund's shareholdings in the Syncrude consortium and AEC, in each case the province's relationship to corporate behaviour has been passive. AEC always has operated with an exclusively private sector board of directors, and in the case of Syncrude it appears that the state's role has been to subsidize the capital cost of developing the vast tar sands deposits, an investment that depends upon high oil prices to cover the extraordinary development and production costs involved. 19.

Softening export markets for petroleum, declining world prices in consequence of overpro- duction by members of OPEC, and a reduction in exploration activity after the federal government introduced the National Energy Program in October, 1980, contributed to a downturn in the provincial economy during the early 1980s. Despite the income generated by steadily rising oil prices during the previous decade and the extensive interventionism of the Lougheed government, the province was no less dependent on the petroleum industry. Economic diversification had not taken place, as suggested by the fact that in 1982 just over 70 per cent of provincial government revenue or $5 billion of $7 billion, was from mineral resources, over- whelmingly petroleum, compared to just under 25 per cent, or $235 million of $1 billion, in 1971.

The provincial government acknowledged this failure in its 1984 White Paper entitled, Pro- posals for an Industrial and Science Strategy for Albertans. One might have expected the AHSTF to be the cornerstone of proposals for an industrial strategy, but in fact the Fund was mentioned sparingly in the White Paper. Moreover, the main reference to the Fund's economic development potential was in the context of 'direct equity participation in oil sands or other major energy projects, if necessary to expedite job activity and the development of Alberta's vast energy resources' (Alberta, 1984:63). Further equity participation in the Syncrude Project was mentioned explicitly (Alberta, 1984:57). There was no suggestion that the Fund generally assume a more active posture in the direction, as opposed to the mere financing, of business activities, with the qualification that 'special circumstances,' particularly in transportation, might warrant a relaxation of the requirements for strictly passive investment governing the behaviour of the Commercial Investments Divi- sion of the Fund (Alberta, 1984:64). Conven- tional tax incentive, export promotion and research and development measures were recom- mended as the basis of a provincial industrial strategy.

Summary Although the Caisse frequently has been accused of 'politicized' investment behaviour, examination of the agency's very large equity portfolio reveals that under 20 per cent of the Caisse's shareholdings are accounted for by Quebec-




based corporations. Of course its purchase of bonds issued by Hydro Quebec and other crown corporations in the provincial economy, considered in the previous section, represents another dimension of financial support for Que- bec's economic development. In the case of the AHSTF, the bonds of provincial crown corporations engaged in infrastructural activities and energy development constitute a main dimension of support for the Alberta economy. With the important exceptions of the Fund's ownership shares in Syncrude and the AEC, equity investment is not a significant component of the AHSTF's portfolio, nor is it oriented toward Alberta-based corporations. If there is not enough evidence to conclude that the Fund's investment behaviour has reinforced the petroleum dependence of the Alberta economy, it at least appears that it has done little to weaken this dependence.

IV Performance

The Caisse Private sector investment funds seek a competitive rate of return on their invested capital, while at the same time attempting to reduce the exposure of their asset portfolio to downturns in the economic situation of particular investments or sectors of the economy. This latter objective is accomplished through the disbursement of investments, thereby reducing the risk of suffering a serious overall loss in the event of the poor performance of any single or small set of investments. The evidence indicates that the Caisse's financial performance generally has been superior to that of the Canada Pension Plan (the assets of the CPP are invested exclusively in government securities) and most other public pension investment agencies in Canada.20 How- ever, it does appear that the equity portfolio of the Caisse is considerably more concentrated than is typical of pension funds.

The Caisse's return on invested capital of 10.1 per cent in 1984 was considerably less than the unweighted average of 16 per cent achieved both by Canada's five major banks and by the country's four largest trust companies. Given the different investment profiles of banks and trust companies on the one hand, and pension funds on the other, a more meaningful comparison is

Table 2 Selected rate of return data for the Caisse, AHSTF, CPP and OMERS, 1978-85

1985 1978-85

a) Overall rate of return Caisse 24% 13.9 AHSTF 13.7a 12.lb CPP 10 8.4 OMERS 24 12.3

b) Canadian equities Portfolio of the Caisse* 27.1 18.1

c) TSE 300 Index 25.1 18.3

*Between 1968 and 1985, the period during which the Caisse has invested in equities, the average annual rate of return on this portfolio has been 12.6 per cent compared to 11.1 per cent for the TSE 300 Index.

a 1984-85 b 1978-79 to 1984-85 SOURCE: Caisse de dep6t et placement, Financial Statements and Financial Statistics, 1985; Alberta Heritage Savings Trust Fund, Annual Report, 1978- 79 and 1984-85; Health and Welfare Canada, Canada Pension Plan, Statistical Bulletin, 1984-85; Ontario Municipal Employees Retirement Board, Inventory of Investments, 31 December 1985.

between the Caisse and other pension funds. Table 2 compares the recent financial performance of the Caisse to that of the CPP and the Ontario Municipal Employees Retirement Sys- tem, the latter being the country's largest trusteed pension fund (assets of Can. $6.3 billion, 1985). The superior financial performance of the Caisse provides no support for charges that political considerations have resulted in ineffi- cient investment behaviour.21

On the question of portfolio diversification, the evidence is somewhat more ambiguous. Currently (1985), the Caisse holds shares in 119 different companies. The ten largest of these holdings together account for 42 per cent of the total market value of shares held by the Caisse, compared to 25 per cent for the ten largest equity investments of OMERS. Whether the less diversified equity portfolio of the Caisse signifies a willingness to incur greater risk in order to promote provincial economic development objectives is not clear from this evidence alone. The corporations that constitute this group of ten largest equity holdings include two of Canada's largest banks and eight industrial corporations, all of which place among the country's 50 largest

326 Stephen Brooks



industrial companies.22 None of these investments can be considered a 'Quebec-corporation,' following the definition provided earlier.

The AHSTF The AHSTF's overall rate of return of 13.7 per cent for the 1984-5 fiscal year compares un- favourably with the performance of the Caisse and OMERS. The return on the investments in the Fund's Commercial Investment Division (6.2 per cent) is calculated on the basis of book rather than market value, and therefore does not express the unrealized income from shares whose market value appreciated during the year.23 But, given that this Division accounts for only 1.4 per cent of the Heritage Fund's total assets, the higher market value return on equity investments would make only a marginal difference in the overall rate of return. For the period 1978-85, the AHSTF experienced an average annual rate of return comparable to OMERS and only slightly lower than the Caisse (see Table 2). The financial costs of the very limited investment in equities by the Heritage Fund (5 per cent of total assets when the Fund's equity in Syncrude and the Alberta Energy Company is added to those shares held under the Commercial Investments Division) have been remarked upon by others.24

Regarding portfolio diversification, the two largest of the AHSTF's shareholdings together account for 63 per cent of all equity assets. There are the Fund's 16.7 per cent ownership stake in the Syncrude Project to produce synthetic crude oil from the Alberta Tar sands, and 37 per cent of the common shares of the AEC, involved in oil and exploration and development, pipelines, and which itself has an investment in Syncrude. As mentioned earlier, these investments are managed under the Alberta Investment Division.

If only the investments in the Commercial Investment Division are considered, the ten largest of these shareholdings together account for 24 per cent of the total market value of equities held by the AHSTF. This compares to 42 per cent of the Caisse and 25 per cent for Omers. James Pesando writes: 'Since there is no development motive associated with the equity portfolio of the AHSTF, there is no reason to believe that this portfolio, as a deliberate act of policy, will be incompletely diversified'

(Pesando, 1985:4-7) Assuming that OMERS provides a fair bechmark, the figures seem to confirm Pesando's conclusion.

Summary The overall financial performance of both the Caisse and the AHSTF, over the period 1978-85, was similar to that of the country's largest trusteed pension fund. In the case of return on equities, the Caisse's record during this period is comparable to that for the TSE 300 Index, and even marginally superior over the entire life of the Caisse's equity portfolio. On the question of portfolio diversification, the fact that the Caisse's shareholdings are considerably less diversified than those of either the AHSTF's Commercial Investment Division or of OMERS cannot be interpreted as evidence of the Caisse's willingness to incur greater risk in order to promote provincial economic development. None of the 10 corporations that account for 42 per cent of its equity portfolio satisfies the criteria of a Quebec-based corporation, as these were defined earlier.

V Conclusion

Both the Caisse and the AHSTF were created in order to channel an expanding pool of public capital into provincial development, within the parameters of a fiduciary relationship. In each case financial support for other agencies of the provincial government was expected to be an important role of the investment fund, providing the means for the expanded state activities deemed necessary to a province-building strategy. And in each case the bond purchases of the investment fund would reduce the dependence of the provincial state on external money markets, a goal which was explicitly acknowleged when the Caisse was established.

In their relationship to the capital requirements of the private sector, the Caisse and the AHSTF differ significantly. The Caisse has been much more active in the area of equity investments, and currently is both the single largest equity investor in Canada and the largest trader on the Montreal Stock Exchange. On several occasions the Caisse has gone beyond the role of passive investor to actively influence develop-




ments within the provincial economy,25 and its policy of seeking representation on the boards of corporations in which it has a large shareholding, while justified by Caisse officials as proper in view of its fiduciary responsibility to the depositors whose savings it invests, betokens a more active role than that assumed by the AHSTF.

It appears unlikely that the Caisse will be significantly affected by the Bourassa government's policies of rolling back the public sector in the province of Quebec. The recent Report of the Committee on the Privatization of State Enterprises expressed somewhat contradictory views on the Caisse, at one point acknowledging that it has been 'a large-scale instrument of economic development' (1986:66) and at another suggesting that its size and independence are excessive (1986:72). However, the Liberal government's policy of privatization means that the sort of intervention that occurred in 1981 under the PQ, when the Caisse acted in concert with the SGF to acquire a controlling interest in Domtar,26 is extremely unlikely.

The equity portfolio of Alberta's Heritage Fund (this includes the shareholdings in Syn- crude and AEC) is about an eighth of the size of the Caisse's, and is heavily concentrated in the provincial petroleum sector. However, the investments managed under the Commercial In- vestments Division are as diversified as the Canadian equity portfolio of OMERS, Canada's largest trusteed pension fund. There is no evidence that the Heritage Fund ever has operated as other than a passive source of equity capital. The AHSTF's support of private capital accumu- lation has tended to be indirect, as through its financing of state-owned housing corporations during the economic boom and accompanying population expansion of the late 1970s. How- ever, if world petroleum prices remain below US $20 for longer than a couple of years, and if demand remains soft, the AHSTF may be called upon to increase its investments in Alberta's tar sands projects.27 The prospect of the Fund being used to bail out the huge development projects, like Syncrude, upon which the province's economic future is perceived to depend, might conceivably inspire the sort of controversy that has surrounded the Caisse's investment be-

haviour, and which to this point has been almost entirely absent from discussions of the AHSTF's purposes. Moreover, as long as the size of the AHSTF remains frozen by the suspension of new revenue contributions to the Fund and the use of the net income generated by its investments for general spending by the province, it is not unreasonable to expect increasing pressure for the relaxation of some of the limits on investment in equities. It is clear that these limits have imposed a heavy opportunity cost on the Fund in the past, and a provincial government unused to budget deficits may find the possibility of increased investment income from an expanded equity portfolio too tempting to resist.

Notes

* I should like to thank Kenneth Norrie, editor of this

journal, and the two anonymous referees for their criticisms of an earlier version of this article, and their

suggestions for improvement. 1 At the national level, the largest of these agencies are the

Canada Mortgage and Housing Corporation, the Export Development Corporation, the Farm Credit Corpora- tion, and the Federal Business Development Bank.

2 Andrew Kniewasser demonstrates the limited role of state financing in his article in this journal (1980).

3 See, for example, 'The Alberta Heritage Savings Trust Fund: An Overview of the Issues,' Canadian Public

Policy - Analyse de Politiques, VI, Supplement (February 1980); Warrack, (1985); Forget (1984); Brooks and Tanguay (1985) and Pesando (1985).

4 An analysis of the Caisse's origins and the initial

expectations held for this investment agency is contained in Brooks and Tanguay (1985).

5 Quebec, Laws, Statutes, etc., Caisse de dpo6t et placement Act, R.S.Q. 1977, chapter C-2, sections 31,32.

6 See, for example, Fourier (1979). 7 A more detailed analysis of the circumstances surround-

ing the creation of the AHSTF, and of the Heritage Fund's structure as this relates to policy, is carried out by Warrack (1985).

8 Non-renewable resource revenue includes royalties from

oil, natural gas, synthetic crude oil and coal, as well as land rentals and fees and the proceeds from bonuses and sales of crown leases.

9 Statutes of Alberta, Alberta Heritage Savings Trust Fund

Act, 1976. 10 Larry Pratt and John Richards (1979:227) note that from

1973 to 1975 the average price of Alberta Crude oil increased from $3.50 to $8.00 per barrel, and that the

provincial government's share of this increased from 24 to 39 per cent.

11 The phrase 'sowing the oil' is taken by Pratt and Richards

328 Stephen Brooks



from the case of Venezuela, and applied to Alberta's energy-based development strategy (1979:230ff).

12 A passage in the introduction to the Fund's first annual report reads: '(T)he investment earnings of the Heritage Fund, and indeed perhaps in the longer term the capital, may provide an alternative source of revenue to help finance government services as non-renewable resource revenue declines'. AHSTF (1977:3).

13 See Smiley (1980:266). 14 In its annual report the Caisse does not identify its

investments in Quebec-based corporations separately from its general listing of equity investments.

15 A rank-ordering of the 150 largest (by assets) Quebec- controlled corporations is published annually by Finance, and this provides the basis for the population of business considered here.

16 While the list of private sector investments published by the Caisse is extensive, it is not exhaustive. Included are all investments in shares and bonds with a market value exceeding $5 million, as well as corporations in which the Caisse holds more than 10 per cent of voting rights.

17 For a description and analysis of the circumstances surrounding this legislation see, Tupper (1983).

18 See Alberta Heritage Savings Fund (1977:37) the table entitled 'Portfolio of Marketable Securities as at March 31, 1977'.

19 On the early history and expected capital requirements of Syncrude, see Pratt (1976).

20 Comparative figures are provided in Finance (9 avril, 1984), p.8.

21 See the criticisms made by Marcel Belanger, president of the Banque Nationale du Canada, in Forget (1984:0).

22 The corporations in this group include Alcan, Bell Canada Enterprises, Canadian Pacific, Imperial Oil, Moore Corporation, Northern Telecom, the Royal Bank. Seagram Company, the Toronto-Dominion Bank, and Hiram Walker Resources.

23 The return at market value for the Fund's equity portfolio is not provided in publicly accessible documentation of the AHSTF.

24 See R. Mirus, 'Opportunities for Portfolio Diversifica- tion,' and the comments by Stephen Jarislowsky, in the special issue of Canadian Public Policy - Analyse de Politiques, VI: 1980:236-44 and 251-3. Jarislowsky estimated the loss at $255 million for 1979 alone.

25 See the discussion in chapter 4 of Brooks (1987). 26 See Brooks (1987: chap. 3). 27 A number of these projects were cancelled over the last

several years, and the current state of activity in developing unconventional reserves of petroleum is one of retrenchment and waiting out the depressed market.

References

Alberta (1984) Proposals for an Industrial and Science Strategy for Albertans, 1985 to 1990 (Ed- monton), July.

Alberta Heritage Savings Trust Fund (1977) Annual Report, 1976-77.

Brooks, Stephen (1987) Who's in Charge? The Mixed Ownership Corporation in Canada (Montreal: Institute for Research on Public Policy).

and A. Brian Tanguay (1985) 'Qu6bec's Caisse de d6pot et placement: tool of nationalism?', Canadian Public Administration, 28:1:99-119.

Forget, Claude E. (ed.) (1984) La Caisse de depot et placement du Quebec (Montr6al: C.D. Howe Institute), January.

Fournier, Pierre (1979) Les societes d'Etat et les objectifs economiques du Quebec: une evalua- tion preliminaire (Quebec: Editeur Officiel).

Kniewasser, Andrew (1980) 'The Effect of the AHSTF on Capital Markets,' Canadian Public Policy - Analyse de Politiques, VI:special supplement:245-8.

Mirus, R. (1980) 'Opportunities for Portfolio Diver- sification', Canadian Public Policy - Analyse de Politiques, VI:supplement 236-44.

Pesando, James (1985) 'An Economic Analysis of Government Investment Corporations, with Attention to the Caisse de depot et placement du Quebec and the Alberta Heritage Fund' (Ottawa: Economic Council of Canada), discussion paper no. 277, March.

Pratt, Larry (1976) The Tar Sands: Syncrude and the Politics of Oil (Edmonton).

and John Richards (1979) Prairie Capi- talism: Power and Influence in the New West (Toronto: McClelland and Stewart).

Smiley, Donald V. (1980) Canada in Question: Federalism in the Eighties (Toronto: McGraw-Hill Ryerson).

Tupper, Allan (1983) Bill S-31 and the Federal- ism of State Capitalism (Kingston: Institute of Intergovernmental Relations, Queen's Univer- sity).

Warrack, Allan (1985) 'The Alberta Heritage Savings Trust Fund as a Policy Instrument for Resources Management' (Montreal: Western Resources Program, Institute for Research on Public Policy), November.




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