David Clinton

A look at Strathcona Resources Ltd.

Does the Canadian government subsidize companies operating in our oil and gas sector? According to research by science and technology journalist Emily Chung, between $4.5 billion and $81 billion of public funds are spent each year for assistance to the industry. But Chung notes how ambiguous definitions (what exactly is a subsidy?) mean that those numbers come with serious caveats.

I thought I’d make this discussion a bit more manageable by focusing on just one industry player: Strathcona Resources Ltd.

Strathcona is big. They produce around 185,000 barrels of oil equivalent each day and the company is currently ranked 98th among publicly traded companies in Canada in terms of market cap ($5 billion) and 88th for operating margin (21.59%).

What Is a Subsidy?

In the context of their report on the fossil fuel industry, the Department of Finance Canada asserts that “subsidies” can include:

• tax expenditures,
• grants and contributions,
• government loans or loan guarantees at favourable rates,
• resources sold by government at below-market rates
• research and development funding
• government intervention in markets to lower prices

The report defines tax expenditures as:

A type of tax measure, such as a preferential tax rate, exemption, deduction, deferral, or credit, with which the government aims to achieve public policy objectives through the tax system.

In the specific context of Strathcona, I could find no evidence that they’d received any direct public funding or “bailouts”. The government did recently announce a billion dollar partnership with the Canada Growth Fund (CGF) to build carbon capture and sequestration infrastructure, but that’s clearly an investment and not a subsidy. CGF is a Canadian arm’s-length crown corporation whose investments are managed by the Public Sector Pension Investment Board.

Strathcona’s 2023 Annual Report includes a reference to only one loan liability, but that had already been paid off and, in any case, wasn’t guaranteed by any level of government.

What Tax Benefits Does Strathcona Receive?

Many. The company’s annual report discusses its $6.1 billion “tax pool”. The pool is made up of deductions and credits that it can’t use this year, but that can be deferred for use in future years. Here’s how those break down:

The “Other Tax Deductions” item includes the Scientific Research and Experimental Development (SRED) deduction. That represents amounts spent on SRED-eligible research that companies can deduct from their payable taxes.

What Grant Funding Does Strathcona Receive?

Open Government data reports that only two federal grants were awarded to Strathcona, both in 2023. The first, worth $3.2 million, came from Natural Resources Canada as part of their Energy Innovation Program. Its purpose was development of Lindbergh Semi-Closed Cycle Flue Gas Recirculation and Carbon Capture.

The second grant was worth $12.5 million. It involved Environment and Climate Change Canada looking for an Orion Organic Rankine Cycle Waste Heat Recovery and Power Generation Project.

What Benefits Do Governments Receive From Strathcona?

Government subsidies don’t exist in a vacuum. As a rule, it’s assumed that subsidies to the private sector work as an investment whose primary payback is in profitable economic activity. Governments can also enjoy direct benefits.

In 2023, for example, Strathcona paid more than $405 million in crown royalties to provincial governments. They also spent $2.4 billion as operating expenses that included labor, energy costs, transportation, processing, and facility maintenance. Most of that money was spent in Canada.

A very rough estimate would suggest that total annual personal income taxes generated by people employed by Strathcona would be somewhere around $14 million. Vendors might pay another $13 million in corporate taxes.

There are also indirect benefits. For instance, those with jobs around the oil patch are, obviously, not unemployed and receiving EI benefits.

We could also take into account the larger impact Strathcona has on the general economy. Think about the food, shelter, clothing, and entertainment spending done by the families of Strathcona (and their vendors’) employees. That money, too, performs important social and economic service.

So does Strathcona receive more from government subsidies than the money they feed back into government accounts? Well, the $405 million in crown royalties are likely annual payments, as are the $27 million paid as income taxes. That’s what governments get. On the other side of the balance sheet, there is the $6.1 billion in deferred taxes and $16 million in grants. Those will probably be amortized over multiple years.

But does the word “subsidy” really describe tax benefits in any useful way? After all, there’s no company in all Canada – my own company included – that doesn’t deduct legitimate business expenses. And each and every Canadian receives similar benefits whenever they file their T1. For illustration, a Canadian whose total income happened to match the national average ($55,600) pays around $5,600 less in taxes each year due to various deductions and credits – including the basic personal amount.

Does that mean we’re all receiving government subsidies? There’s nothing wrong with thinking about it that way, but it does kind of strip the word of any real meaning.

Now you could reasonably argue that $6 billion is an awful lot of deferred tax, especially for a company with a 22% operating margin. And you could look to the tax code’s complexity for answers as to how this could have happened. But that’s not a subsidy in any coherent sense.

Think the tax code should be reformed? The line forms right behind me. However, the problem with playing around with the tax code is that changes apply to everyone, not just Strathcona or some other preferred target. Successfully anticipating how that might play out in dark and unanticipated ways isn’t the kind of thing for which governments are famous.

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 David Clinton

Global Affairs Canada and the strange, wonderful world only they can see

This is an older (and longer) version of an article just published by the Macdonald-Laurier Institute.

Some may think of the people behind Global Affairs Canada (GAC – also known as Department of Foreign Affairs) as Canada’s brightest and best, executing a sophisticated and far-seeing foreign policy. They may be right. But the description that more readily comes to my mind is “completely out of control.” I may be wrong.

But if I am wrong, I’m not the only one. Vivian Bercovici – a former Canadian ambassador to Israel – quoted former Prime Minister Harper as saying “that in his 10 years in office, the most difficult department for his government to work with was Foreign Affairs.”

What is it about GAC, and Western foreign services in general, that makes them so subversive? Bercovici puts it this way:

“In the postwar years, foreign-affairs bureaucracies in Western democracies ballooned in size. Foreign-service officers saw themselves as better-informed and -trained to manage diplomatic complexities than the elected officials they supposedly served. They also mastered the art of diffusing responsibility and outcomes among the many layers and offices engaged in any particular issue. As a practical matter, this means that neither success nor failure is attributed to individuals, resulting in a lack of accountability throughout the organization. It also means that internal sabotage of the will of government is more easily effected and concealed. Where authority and responsibility are blurred, accountability is impossible.”

All that’s well above my pay grade. But I’m perfectly capable of observing the work GAC actually does. So I’m going to discuss three specific GAC programs that seem to present some unhealthy processes and patterns. Perhaps they’ll help us reach useful conclusions.

GAC and the Global Fund

According to GAC’s Project Browser tool, between 2008 and 2022 Canada committed $3.065 billion to the Global Fund to Fight AIDS, Tuberculosis and Malaria. Which on the face of it is great. No one here is cheering for Team Malaria, right? But we should ask a couple of questions:

1. Is the scale of the support appropriate given financial constraints back home?
2. Was that money well spent?

I’m not going to even try to answer the first question: that’s something for Canadians to talk about as a society. For context though, GAC’s total annual budget for foreign aid funding seems to be in the neighborhood of $16 billion (of which around $2 billion goes to United Nations agencies). $16 billion would represent roughly 4 percent of total annual federal government expenditures.

However I do have a lot to say about question number two. First of all, the Global Fund to Fight AIDS, Tuberculosis and Malaria has been dogged by serious accusations of corruption and lack of transparency for more than a decade. That means there’s a good chance a substantial proportion of our money ended up moving through private Caribbean bank accounts on its way to cozy dachas in Sochi.

But I’m going to ignore that for now because we can’t be sure the funny business is still happening. And because if we canceled all government programs that were at risk of misuse we’d have to lay off the entire federal civil service. Which would be a very bad thing, because…well it just would.

Instead, I’ll focus on measuring the impact of our investment. What were the goals GAC set for its Global Fund contribution? Their own website fills us in:

“The expected results are defined by the “Global Fund Strategy 2017-2022”. This strategy includes the following targets, to be achieved by 2020: (1) 90% of persons living with HIV (PLHIV) know their status, 90% PLHIV who know their status and receiving treatment; and 90% of people on treatment have suppressed viral loads; (2) a 20% and 35% decline in TB incidence rate and TB deaths respectively, compared with 2015; and (3) at least a 40% reduction in malaria mortality rates and malaria case incidence, compared with 2015.”

The GAC planners obviously felt that spending $3 billion over five years or so was reasonable as long as, between 2015 and 2020, it contributed to a 35 percent decline in TB deaths, a 40 percent decline in malaria deaths, and the 90%-90%-90% formula for people with HIV. And I’ll admit that it’s a compelling argument.

The thing is though, that no one could have known whether we’d actually achieve those results. And given the built-in ambiguity of the program’s goals, it’s not we could ever know whether it was a success. The decision therefore was a gamble. And the table stakes were $3 billion belonging to Canadian taxpayers.

Should nameless, unelected planners have that much power over our money? Assuming that they’re genuine domain experts, then sure. Who else is better? But:

With great power comes great responsibility. (Nietzsche? Kant? Aristotle? Nope. Spiderman’s uncle)

Claiming to possess domain expertise isn’t free: if you break it, you own it. So if death rates happily fell during the program years then the planners should be rewarded for their service to humanity. But if they didn’t fall, or if they didn’t fall as much as predicted then, at the very least, people should lose their jobs.

Fortunately, with the hindsight allowed us by historical data, we can easily see how things worked out. Unfortunately, it looks like the fine folk at GAC stepped on a rake.

Our World in Data numbers give us a pretty good picture of how things played out in the real world. Tragically, Malaria killed 562,000 people in 2015 and 627,000 in 2020. That’s a jump of 11.6 percent as opposed to the 40 percent decline that was expected. According to the WHO, there were 1.6 million tuberculosis victims in 2015 against 1.2 million in 2023. That’s a 24.7 percent drop – impressive, but not quite the required 35 per cent.

I couldn’t quickly find the precise HIV data mentioned in the program expectations, but I did see that HIV deaths dropped by 16 percent between 2015 and 2019. So that’s a win.

But it’s clear that the conditions underlying the GAC wager were not met.

To be fair, GAC reporting in 2023 claims that: “Since 2002, (their) efforts have contributed to a significant decline in deaths caused by AIDS (‑70%), TB (‑21%) and malaria (‑26%).” – but those figures are unsourced, badly outdated, and completely fail to account for program spending subsequent to 2015.

The government gambled more than $3 billion of taxpayer funds and lost the bet. To date, they have yet to apologize, assure us that they’re busy reassessing their future commitments, or publicize their plans for the individuals who so carelessly lost our money.

For that matter, were those individuals even GAC employees? It’s possible that the decision was made by representatives of the uber-expensive contract consulting firm, McKinsey. When will that information become public?

GAC and the World Food Programme

The Global Fund deal was one bad multilateral bet. Were there others? Sure. Over the five years between 2016 and 2021 GAC entrusted a total of $125 million with the UN World Food Programme to provide emergency food aid. Africa represented 60 percent of the program’s target, and the one policy marker designated as a “significant objective” was gender equality. The programs expected results included:

• Improved access to food and nutrition assistance for food-insecure populations
• Increased ability of the World Food Programme to provide appropriate responses to humanitarian crises

Overall, the “expected ultimate outcome is the reduced vulnerability of crisis-affected people, especially women and children.” Unfortunately, here too, the numbers moved in the wrong direction. As the graph shows, numbers from Our World in Data show that the percentage of people across the African continent who lack the minimum daily caloric intake – despite years of declines – has been climbing steadily precisely through the GAC’s program timeline. Malnutrition went from 15 to 19.7 percent since 2013.

I’ll admit that I can’t be sure I’m not oversimplifying things here. There could well have been powerful geopolitical or macro economic changes behind surges in malaria and malnutrition. Perhaps those crises would have been even worse had Canadian funding not been in place. Global events seldom have easy explanations.

But what I can see is a fairly consistent pattern. GAC spends hundreds of millions and billions of dollars on multi-year agreements with multilateral organizations. Key success indicators are rarely met. Persistent rumors of corruption and incompetence (and worse) often hover above the largest aid organizations. But there’s never any evidence of comprehensive program and mandate assessments within GAC itself. They might happen, but they’re not telling us. And that’s a problem.

Note: I received no response to repeated efforts to reach GAC officials for comment on these programs.

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GAC and the United Nations Relief and Works Agency

The government of Canada – through GAC – has long been among the major financial supporters of The United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA). Leading up to the Hamas massacre on October 7, 2023, the 75 year-old United Nations agency had a yearly budget of more than 900 million U.S. dollars, and had long been accused of antisemitism, corruption, and complicity in war crimes.

At various points long before the current war, the Netherlands, Switzerland and the Unites States had all felt compelled to suspend payments to UNRWA over related concerns. The Harper government cut funding to UNRWA in 2010, but Prime Minister Trudeau restored it in 2016. Canada briefly froze funding to UNRWA in January 2024 due to the organization’s connections to the October 7 attacks but once again restored payments in March.

I’m curious to know what the quarter billion dollars that Canada has donated to UNRWA since 2016 was used for and what safeguards the government imposed to ensure we weren’t facilitating criminal or genocidal behavior.

In fact, the official record of Canada’s parliament includes the unanimous agreement of the Standing Committee on Foreign Affairs and International Development from Thursday, February 4, 2021, when they declared:

“That the committee express its deep concern about certain educational materials circulated to students by UNRWA during the pandemic in error that violates the values of human rights, tolerance, neutrality and non-discrimination, at a time when UNRWA is receiving funding from the Government of Canada, and report this motion to the House”

It’s noteworthy that the final version of the text included the phrase “in error”. That addition was not agreed to unanimously, because it would suggest that the copious educational material openly promoting extreme nationalism and violence against Jews somehow only found its way into classrooms by some weird accident. (Someone might have left a window open and the wind blew book-filled boxes in. Could of happened to anyone.)

In the end, only the four Conservative members of the committee opposed the “in error” phrasing.

The motion was originally inspired by a report published by the Institute for Monitoring Peace and Cultural Tolerance in School Education (IMPACT-se). That report documented many instances of the glorification and promotion of violent Jihad, martyrdom, and terrorism within UNRWA educational materials.

As it turns out, it’s now clear that not only was the content created by UNRWA and included in their curricula by design, but it’s still being printed and widely taught in UNRWA schools (when they’re operational). The agency’s only practical response to the criticism was to remove references from their public-facing website.

Further research by IMPACT-se in the aftermath of the October 7 attacks has revealed how, for instance, “13 UNRWA staff members have publicly praised, celebrated or expressed their support for the unprecedented deadly assaults on civilians.” The report also documents how at least 18 UNRWA graduates have “died carrying out acts of terror.”

Of course, our concerns go far beyond education. Since the start of Israel’s land offensive in Gaza, it’s become painfully obvious that UNRWA schools and hospitals have been used as rocket launching areas, weapons storage facilities, and access points for Hamas military tunnels – all clear war crimes. It’s difficult to imagine how a reasonable person could conclude that UNRWA officials – and those providing program oversight – were not aware of those violations.

More recently, the UN itself admitted that at least nine of its employees “might have” been involved in the October 7 massacres and will be fired.

GAC – at least in its public statements – hasn’t ignored the problem. In June of 2023, they announced that:

“Canada will remain closely engaged with UNRWA and continue to exercises (sic) enhanced due diligence for all humanitarian and development assistance funding for Palestinians. This work includes ongoing oversight, regular site visits, a systematic screening process and strong anti-terrorism provisions in funding agreements.”

The problem is that subsequent credible revelations have demonstrated that the “oversight” and “regular site visits” promised by GAC either never happened, were an embarrassing failure…or something much worse.

Canadians have a right to know how their money is spent. It would be helpful if the government, and Global Affairs Canada in particular, would at the very least tell us exactly how they’re going to fix these messes.