Opinion: Saskatchewan can no longer ignore potash royalty reform

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So much has been recently said on the subject of potash taxation.

Former finance minister Eric Cline argued in his new book that Saskatchewan’s potash wealth was being squandered. Economist Erin Weir suggested Saskatchewan was failing to collect fair returns from windfall potash profits.

Conservative economist Jack Mintz has recommended that Alberta’s royalty on oil and gas be used for potash. I myself have express the same opinion.

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Conversely, recently re-elected Saskatchewan Party MLA Warren Kaeding — just named minister of trade and export development — said calls for royalty reform sent “shivers down the spines” of the potash sector.

He went as far as saying any review would see Mosaic and Nutrien leave Saskatchewan to set up shop in Vladimir Putin’s ever-so-stable Russia. Who does he believe companies would sell their lucrative local mines to, or is a potash mine no different than a mobile home?

And yet, despite Kaeding’s questionable rhetoric, his concerns regarding investment shouldn’t be ignored.

Both the current government and its newly enlarged opposition presently maintain the need for “stability and predictability” in Saskatchewan’s potash royalty system. The reality is that the current potash tax regime by no means can be described as stable, predictable or otherwise certain.

Saskatchewan’s potash tax regime is bad for investment. The primary concern with risk and stability when it comes to tax reviews is the frequency of change, not the fact that change occurs.

Just as important as certainty in what tax structures consist of is complexity, which will persist if a broken tax system goes unchanged. It is frankly feckless of current politicians to claim reform would discourage investment when the complexity and uncertainty of the current tax regime does precisely that.

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According to Mintz, Saskatchewan’s potash royalty is the world’s most inefficient and complex. In other words, it creates its own risks for investors. It benefits neither investors nor industry, business or government.

Taxation of our potash varies with production volume and investment size. Built-in subsidies based on the level of investment in the arbitrary year of 2002 haven’t been adjusted or considered since then.

In Mintz’s words, “the restrictive conditions attached to these tax incentives based on investment size and/or production volume pose constraints and uncertainty for future investment planning.” That is to say, the current tax regime adds risk instead of clarity for investors.

Some may still question how Saskatchewan’s potash royalty can discourage investment if a company like BHP is committing large capital quantities to a project like the Jansen mine. At no time has BHP asserted or implied that they’ve invested in potash thanks to favourable royalties.

Their website instead mentions the inevitable value of potash over time, acknowledging that demand for fertilizer will continue to rise as populations grow and less arable land exists for crop production.

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Their investment is a long-term play, and a simpler tax regime could only aid BHP in making financial projections that would allow the company to proceed with future expansions of the Jansen project.

We should thank our lucky stars that BHP’s financial managers are so forward-thinking. Aside from this investment, according to Erin Weir, 90 per cent of Saskatchewan’s potash is currently produced by nine mines built in the 1960s.

Saskatchewan’s present potash tax regime is over two decades old, yet scarcely any of the province’s potash production comes from new mines today.

Saskatchewan’s government and potential investors benefit from simplicity. Present complexity, and not the uncertainty of change, should be the chief concern of politicians when it comes to potash royalties.

Saskatchewan has what the world needs, but tax complexity and inefficiency continue to act as barriers to unleashing that wealth for the benefit of Saskatchewan’s people.

It’s time Saskatchewan got its act together and crafted a new potash royalty structure in careful consultation with experts and industry.

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If stability and predictability are truly concerns for the government, then the need for investment-focused potash royalty reform can no longer be ignored.

Ty Thiessen is a University of Saskatchewan student researching methods of government finance and debt reduction.

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