2016 Keynote

Brad Ferguson, President & CEO

January 12, 2016

 

INTRODUCTION

Every morning I wake up to a big blue Alberta flag that flies proudly in front of our house. It flies with pride because, to my family, it is a visible symbol of our history and our potential, of our sense of place and of our understanding of who we are as a people.

Every morning I also wake up with the responsibility for our two sons, Evan and Michael, 4th generation Albertans, who hopefully embrace the same history and values of those who helped build their province, and one day they can continue this great history that is all of ours.

And what an incredible history it is – a history of boom over bust; of triumph over hardship; a history of finding opportunity amidst adversity, and a history of generating an incredible level of social and economic prosperity that others could only dream to achieve.

A history that started thousands of years ago on this particular bend on this particular river, where people came to trade, to learn, to celebrate and to heal.

  • A place of beauty, as portrayed on our flag, where the land provides abundance, the soil provides sustenance; the mountains provide permanence; and the blue skies provide unlimited imagination.
  • A place of richness where people come in search of opportunity, and find it through the important combination of hard work, determination and courage.
  • A place of ruggedness and resilience that has tested generations of Albertans through droughts, floods, tornados, bad hockey teams and no shortage of cold dark nights.
  • A place where neighbours help neighbours, no matter how far it is to walk, because there isn’t an expectation or an entitlement of relying on anyone other than ourselves.
  • And a place where compassion goes hand-in-hand with wealth creation, knowing that when the two are in synch, there is no better place on earth.

These are the stories of our province and our city.  These are the stories of the MacTaggarts and the Pooles, the Naqvis and the Guptas, the Zeschuks and the Muzykas, the Shocters and the Spenellis. They describe our history and values, and they describe us as a people.

These stories need to be present in our hearts and minds, as we find ourselves surrounded by a very distorted world.

 

WORLD VIEW

The world around us has lost its compass. The current economic environment, which I believe may persist for a considerable period of time, is in total disarray. There has been no other period in modern history when, all at the same time, debt levels have been so high; the pace of technology change so rapid; geopolitical tensions so extreme; energy prices so volatile; and interest rates so low for so long.

The result will likely be one of the most challenging eras through which our business, community and political leaders must navigate, as the weight of gravity is against us.

You won’t like what I have to say today. I don’t like what I have to say today. But we cannot let political correctness and artificial sunshine get in our way of coming together as a community, getting to work, and turning our economic future around.  And make no mistake about it, we can turn it around.

Today, I’m not going to subject you to too many boring graphs and economic charts. Rather, I will try to explain where we are globally, how we got here nationally, and how we can get things turned around provincially and locally.

 

GLOBALLY – 5 KEY DRIVERS OF GRAVITY

Global debt has escalated.  For the past decade the entire world has tried to stimulate growth through monetary policy, the easing or printing of money. We’ve politicized our central banks with the goal of keeping governments in power, and it hasn’t worked. In fact, it’s been toxic to governments, businesses and citizens.  The idea of using debt to stimulate growth is incredibly addictive for politicians, but every time it is the citizens who end up paying the price while governments simply get bigger and bigger.

Global growth has stalled.  Europe has been stagnant for the past ten years; Japan has declined for over 20. Emerging Markets which accounted for most of the global growth over the past decade have spiralled down, led by an economic meltdown in China the world’s largest consumer of commodities as well as private debt, Brazil who is essentially bankrupt, and Russia who is spending 32% of their GDP on military. And now the United States is stalling, rather rapidly, with recession lingering once again for the year ahead. Global growth for 2016 was projected, at the beginning of September to be 3.3%, at the beginning of November it was 3.1%, and now in January it is projected to be 2.8% and the year is just starting.

Commodity prices have declined. When global growth stalls, the demand for commodities grinds to a halt, depressing major sectors like energy and precious metals right away, and agriculture and forestry lagging behind. Lower demand means less export and trade, and if you look at the Baltic Dry Index for shipping, global trade has collapsed to a record low that is going to have a significant impact on asset and equity values in the year to come, punctuated by the fact that we just lost $2.5 trillion in market capitalization in the first 5 days of trading this year.

Energy supply seems limitless. Last year, global oil production increased +2.1% from 95Mb/d to 97Mb/d. Demand increased +1.8% from 93.5Mb/d to 95.2Mb/d and the price plummeted. Going into this year, OPEC has lifted the ceiling on their production, creating an every-member for themselves free for all. Then, last week Saudi Arabia began contemplating an IPO for Aramco, valued at $1 trillion, to ensure it can defend its market share. The United Stated lifted its 40-year old export ban and is adopting new extraction technologies faster than anyone, driving down their cost of production in order to compete. At the same time +4.0Mb/d of new production is expected to come on stream from Iran, Libya, Kuwait, Qatar and the UAE, all at a time when global demand is expected to slow to only +1.2Mb/d before we even start talking of a global recession. The consequences will continue to be felt by everyone, but specifically by high marginal costs producers like Venezuela, Nigeria and Canada.

Geopolitical instability has erupted.  Are oil prices going to come back? Not without some help from the one thing that has been consistent over history, and that is geopolitical instability. Mr. Putin clearly outmaneuvered the West in the Ukraine, then in Syria, and is now working with closely China, Iran and other Eurasian Economic Union regimes to shift the balance of power. It would not be unreasonable to expect a further push of ambition in the final year of this US president. North Korea, Iran, Saudi Arabia, Israel, ISIS, another Arab Spring, or more locally, the rise of Trump or unrest in Oregon or an uprising over Bill 6.  We are in an incredible time of volatility and anxiety, all around the world.

 

NATIONALLY – UNCOMPETITIVE & ADDICTED TO DEBT

Nationally, we seem remarkably naïve – and I’m not talking about foreign policy – rather remarkably naïve about our own economy. We have the second largest land mass in the world and a population of only 36 million people. We are an exporting nation, period, which means we need to produce and move our products to market cheaper than our customers can get from other places. Over 60% of our exports come from Alberta and Ontario, our resource sector and our manufacturing sector, and both provinces are on a slippery slope which is jeopardizing the long-term competitiveness of both of these sectors and our country.

Like Alberta, Ontario’s largest export customer across the border has become their competitor, as the US has been investing in research, technology and manufacturing capacity at rates 6x that of Canada for more than a decade. And over that decade of decline, the Ontario government has become the largest sub-national debtor in the world with provincial debt that grew +80% over the past 10 years to $294 billion, Net Debt to GDP increased +48% over the same period, Equalization Payments increased +88% over the last decade, resulting in Provincial Debt now over $21,000 per person in Ontario, and Annual Interest on that debt costing every person $840 per year. This byfar dwarfs any debt situation in California, but Ontario’s addiction happened so fast, in only a decade.

The drug, the heroin, in our society is called “cheap debt” or perceived “free debt” given our low interest rate environment. And I experimented a lot with this drug in university, using credit cards to buy beer and student loans to pay off credit cards. It was awesome, I was wickedly popular, until I graduated and realized that my income wasn’t quite enough to cover even an ichiban noodle lifestyle. All I can say is that I’m glad I learned that lesson early, before there were more zeros on the credit card statements. Imagine experimenting with a $40 billion provincial economy?

For politicians, debt is an addiction that can do a remarkable amount of damage in a very short period of time. And I get it. I get the rush and the high that comes with spending to do something good for the people today, or to help you be popular, or to say hey everyone is doing it and besides I’m just doing it a little. But government’s responsibility is not only to make its current adult and senior population happy; rather, government needs to consider those that are young, like my kids and your kids, and those not yet born, for it is they who will carry the burden of debt.

Debt is now also like a street drug. After the 2008 credit crisis, sparked by the invention of the home equity loan, Canadians keep poking that little needle in their arms at a pace that will likely end up with an overdose. In fact the middle 60% of Canadians, our middle class, are on this path, and this isn’t going to end well. During the federal election campaign, I was surprised when the Liberal campaign focused so much on the middle class. I was surprised because compared to the other OECD countries over the past 10 years, Canada’s middle class has vastly outperformed all others. But then I started studying the escalation of personal debt levels in this country, and the fact that middle income wages have been relatively stagnant since 1995. Only then did I start to realize that we have entered what I call the Age of Anxiety, where people and families are doing everything possible and are still unable to make ends meet. Anxiety breeds desperation, and in a world of desperation, values tend to get compromised.


PROVINCIAL & LOCAL IMPACTS

What does that mean provincially and locally? Global growth is stalling, commodity prices are declining, unemployment is accelerating, middle class wages are flattening, personal debt levels are peaking, tax rates are compounding, competitiveness is weakening and return of capital is disappearing.

I use return on capital for a reason, because if there is no return, there is no capital investment, and capital investment has been the fuel that has built this economic engine called Alberta.  If there is no capital investment, there is no job growth and no increase in government revenue. None. So the key discussion topic is how we create an environment that can generate a healthy return on capital, because over the last 12 months that return has been significantly deteriorated across all industries.

It started with a federal policy change on temporary foreign workers, we saw personal income taxes increase, corporate income taxes increase, a phase-one minimum wage increase, carbon taxes on emitters, carbon tax on consumption, electricity and heating cost increases, new regulatory burdens, higher import costs on machinery, equipment and food, a delayed royalty review and a substantial amount of new provincial debt and new interest payments. No wonder our investment attractiveness has dropped to 38th position, which makes it extremely hard to compete for investment dollars against a province next door ranked 8th.  Brad Wall could not be happier.

Now I know EEDC is a publicly-funded agency, so this year we did what you all have already done. We worked with our Board, the Mayor and City Council, our Executive Team and our Staff, and we did a deep dive on our operations. And I’m proud to say that last month we were the first city-owned organization or city branch in history to request a -2% budget decrease in order to help keep your municipal taxes as low as possible. We did this because it was the right thing to do, and we hope to see others in the public service do the same.

If you think I am up here blaming our current provincial government, you’re wrong. They inherited 10 years of drunken-sailor euphoria that came after the Klein years, which was the last time we made hard decisions about size of government, debt repayment and government program spending.

We, in this room, didn’t do our job over the past 10 years of euphoria and we didn’t hold our government to account. Government spending increased at twice the rate of population growth plus inflation which has created an unsustainable cost structure and a culture of dependence on program spending. We watched our net assets deteriorate and we never once forced the discussion on a revenue framework that protected us from a downturn in energy prices. This is a lesson to all Albertans, that today we would be suffering the consequences regardless of the party in power.

But there is a party in power, and our new government now needs to manage this province with astuteness and precision. It doesn’t matter what political ideology was campaigned on, our government has a responsibility to steward this province forward for the best interest of Albertans and future Albertans. As I see it, they have a choice: to govern from ideology that risks temptation to follow Ontario into a financial vortex of despair; or, to govern from the centre and implement fiscal and economic policies that will require patience from their supporters, but achieves a balance between economic reforms and economic growth.  That is what leadership is all about, and it is a requirement of the job.

John F. Kennedy once said, “Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.”

One thing being a parent has taught me, is that when you have responsibility for the next generation you abandon your right to be reckless. Pursuing economic growth without economic reform was reckless over the past 10 years.  Pursuing economic reforms without economic growth would be equally as reckless in the years ahead.  It is critical we get the balance right, or the consequences will echo for generations.

I started this address talking about my kids and our proud history in this province. I used words like rugged and resilient, hard work, determination and courage, triumph over hardship. Yet over the past six months we’ve been made to feel ashamed of our history, the embarrassing cousin that no one wants to talk about, the outlier among provinces.

I’ll let you in on a little secret. I always want my kids to be outliers. I never want them to be average.

I have no problem making incremental changes to economic and social policies, but if it is done in a way that undermines history, culture and identity, then I take great exception. Because being the freest, most entrepreneurial, least unionized, least subsidized, least regulated, hardest-working province in Canada is what has made us successful. It is our brand and our way of life, and by remaining steadfast to those principles, we have consistently outperformed every other jurisdiction in Canada and North America.

 

THE ROAD FORWARD

We’ve had ups and down before and we will have ups and downs again. This downturn will be harder because there is so much gravity against us. And some of you may be thinking about quitting, leaving, moving somewhere else, paying taxes somewhere else. And I understand those feelings. But this is your province, your home, your history. We need to dig deep as a people, come together as a community, and never quit the fight, because there is no much still to achieve.

What I would like to lay out today is five areas of focus – each of which has a call to action for everyone in the room. Our current economic and political climate will likely be around for the foreseeable future, so we have lots of work to do. The next 2-3 years will require some tough slugging for everyone – governments, institutions, businesses, families and individuals will all need to do their part. But in three years, if we are united and do this properly, this city and province will emerge even stronger than it’s been in the past, an economic powerhouse for our country, an incredible place for the next generation of Albertans to be born into, and a place where everyone will again want to come in search of an abundance of opportunity.

  1. ENTREPRENEURSHIP

The most important thing we can do is continue to invest in talent. Every year we commercialize 10,000 new products from our post-secondary institutions when they walk across the stage and into the marketplace, and we need to hire them. They are the innovators that bring the entrepreneurial spirit into our businesses, our startups, our government departments, our hospitals and everywhere in between in order for us to come up with the next generation of products and processes and services. Entrepreneurial thinkers also need collision spaces like Startup Edmonton and they need mentoring and capital in places like Tec Edmonton and they need early expansion space in places like the Edmonton Research Park. In fact, these facilities are near capacity and in 2016 we will be looking for landlords to bring more of these entrepreneurial spaces onto the market.

Our entrepreneurial ecosystem in this city is working exceptionally well, and is turning out high growth companies like Jobber, Yardstick, Granify, Poppy Barley, Earth Water and Bioware that are recruiting big numbers of people and driving wealth creation during this downturn. But there are still areas that we are massively underdeveloped in, and those are in the areas of (1) Health Innovation (turning our $19 billion health delivery system into a Health Industry that benefits the local economy); (2) Agrifood (which is provincially run and not connected at all to our local ecosystem of networks, mentors, programs, facilities and capital that supports entrepreneurs); and (3) a shared maker space (that allows creative people access to tools, trades, software, fabrication and instruction to do rapid prototyping). We will be bringing each of these three strategies to market this year to continue to drive our entrepreneurial culture, and I encourage all of you to think about how you can, not sit back and wait out a downturn, but use these facilities, programs and bright minds to start making your products, processes and services much more competitive.

  1. EXPORT & TRADE

Wealth creation happens when money comes into our economy from outside to buy our goods and services, and Alberta-based companies need to continue to develop markets for their products and services outside this jurisdiction. Our past federal government worked hard over the past 10 years to open up 25 new countries under which we have free trade agreements, yet 85% of Alberta-based companies generate 100% of their revenue from within our borders.

For some reason our government remains silent on the TPP (Trans-Pacific Partnership) Agreement which now needs your voice. We generate about $50 billion per year from TPP countries, which are also our highest growth markets, despite an incredible number of tariffs, taxes and restrictions. The TPP should be a priority for our province in discussions with the federal government and, although we are not an advocacy organization, I can certainly encourage our business community to develop their voice on this matter and let our politicians know that this is significant for our economy.

Pipelines also matter. Not only do they get our product most efficient to market, but the construction of pipelines in Western Canada is good for local companies. Kinder Morgan’s Trans Mountain Pipeline between Edmonton and Burnaby would generate 678,000 person years of employment, $18.5 billion in revenues for federal and provincial governments and $49.8 billion in after-tax profits (otherwise known as wealth creation) over the first 20 years of operations, the largest share of which accrues in Alberta.

Export & Trade are essential parts of the wealth creation formula, and to be stalled by analysis and indecision at this time just perpetuates the reasons why investment continues to sit on the sidelines when in fact we need it activated.

At EEDC, we can’t approve a trade partnership or a pipeline, but we can work with the Edmonton International Airport to continually improve our position as a logistics and transportation hub to get your products and services efficiently to market. Last year, Edmonton developed direct access into Europe via Amsterdam on KLM, into Asia via Shanghai on Air China Cargo, which also gives us access to South America through Dallas/Ft. Worth. Now we need businesses to start opening their minds up to the possibilities associated with new markets in eastern Canada, the United States and internationally, because Alberta will not be much of a growth market in the coming years and we clearly have a massive need to diversify our sources of revenue.

Everyone has a role in making these opportunities come to life. Sometimes it’s taking the risk and exploring a new market, sometimes it means attending a roundtable with politicians, and sometimes it requires something very uncharacteristic of our past, like writing a letter of support or attending a town hall to give MLAs and MPs the courage to make the right decision.

  1. ENERGY INNOVATION

If Mark Twain was an Albertan, he would say, “The demise of the fossil fuel industry has been greatly exaggerated.” This province has been blessed with an abundance of energy products like no other. Conventional Oil, Oil Sands, Natural Gas, Coal and Coal Bed Methane – their extraction and production have created billions of dollars in wealth, billions of dollars in government programs, billions of dollars in research and development. And there are trillions of dollars and trillions of barrels more available if we are smart enough to create: (1) CO2-Free Emissions; (2) Enhanced Oil Recovery; (3) Carbon Capture & Storage; (4) Clean Coal; (5) Safest Pipelines in the World.

Our energy industry is a platform for innovation. These five challenges should be our innovation imperative and should be the focal point of our research and innovation system. Our innovation goal should be to reduce the cost and extend the value of our energy sector, and the Government should be putting incentives in place for businesses to massively increase their R&D spending, and for entrepreneurs and innovators to collaborate on solutions. This is the logic behind the $20 Million COSIA Carbon XPrize, and we should have many more of such grand challenges. Think about multiple teams of laid-off oil workers partnered with scientists to figure out how to recover the 70% of oil that is currently left behind in every well we drill.  This makes much more sense to me than talking about shutting down one or phasing out one of our competitive strengths, or making green infrastructure investments in which we have no competitive advantage.

How does it create value? Let’s take recognized scientist Carlos Montemagno, who has over 100 researchers working with him at the Alberta Ingenuity Lab on what is called the Carbon Transformation Project. If successful, the project will show how you capture CO2 from an industrial plant, and through a process requiring artificial light, water and electricity it would create more than 70 commercially valuable carbon-containing chemicals which form the building blocks for commercial and industrial products like antifreeze, polyester fibres or food additives. Energy innovation means investing in these sorts of projects and ventures that are good for strengthening our economy.

Our energy future is all about innovation – always has, and always will.  And if we get it right, not only will Alberta help nullify the negative effects of fossil fuels, but it will create thousands of high paying jobs, it will position Alberta with a competitive advantage globally, it will drive wealth creation, and it will prevent us from having to buy acres and acres of solar panels from China.

  1. TOURISM, CONFERENCES & MAJOR EVENTS

One of the bright lights of a 71-cent dollar is our tourism industry, and I’m forever thankful to Edmonton’s Destination Marketing Hotels for supporting our Tourism division in building the Edmonton brand, investing in our major events, promoting new flights and attracting new conferences.

Two years ago we launched our Explore Edmonton and Edmonton Original campaign which has won numerous awards, and is really starting to differentiate Edmonton as a regional tourism destination. Our goal remains to make Edmonton attractive 52 weeks a year, and our effort is unrelenting.

Success of our major events strategy that has focused on summer sports is now ready to be expanded to include major arts & cultural and other events. We have new facilities and hotels opening in the fall which are reason to celebrate, and a huge opportunity to invite people back to see a very different Edmonton than existed a decade ago.

With Northlands needing to reinvent its future, we have been working constructively with Tim Reid and his team to end the 30-year old discussion of how we can best market the city under one banner, how we can stop competing against each other for conferences and conventions, and how we can create a permanent event site that allows us to go after and win bigger and better productions, which there seems to be an insatiable demand for in this city.

And as we evolve our Tourism brand, so too is there a need to evolve how we market our City within the province.  Every year we spend millions of dollars marketing this word called “Alberta” with our beautiful mountains and landscapes, and our national parks have seen the benefit. Consciously, we need to start shifting some of our brand efforts from landscapes and mountains to our cities – Calgary and Edmonton – as that is where people fly into, those are the urban experiences today’s travellers are craving, and those are the locations that drive wealth creation for the majority of Albertans. It’s time to put the experiences in our cities on par with the exploration of our mountains and landscapes, especially when targeting North American consumers.

In the year ahead, even though we have a 71-cent dollar, we need your help. We need businesses to continue to support our major events through your sponsorship, because those major events create an energy, rhythm and pulse in a city that exudes confidence, attracts tourists and give people amazing experiences through tough economic times. As well, many of you also sit on boards and belong to organizations that have annual conferences, and although it’s great to be a delegate and attend those conferences in Atlanta or Washington, it’s time those organizations and associations and delegates experience Edmonton. Compared to other jurisdictions, our meetings and convention business is severely underdeveloped, and it will take partnership between us, the business community, the municipal and the provincial level to compete and win.

So we are asking each of you to pause, dig deep and think about how you can help our sales team identify, qualify and bid on conferences and conventions. It is Edmonton’s time and your leadership can truly help us close some future opportunities that create wealth in your hometown.

  1. LEADERSHIP IN THE PUBLIC SERVICE

Our last area of focus is a bit unconventional, but so important. Governments around the world are getting bigger, more in debt and more bureaucratic. In this country we have three levels of government with the risk of introducing a fourth at the regional level. There needs to be an intervention. There needs to be an intervention because we can barely afford the multi-tiered system that we have, and we certainly cannot afford it becoming more engorged.

We are in a time of austerity and urgency. We need to bear down and challenge our elected officials and bureaucrats to do their part, and by their part I mean becoming more efficient, less bureaucratic, faster, simpler and allowing those closest to the customer (the citizen) to deliver services.

It can be done. But it is about redefining leadership in the public service and our expectation of performance. And we should start in my own organization’s backyard, with economic development and the innovation system.

We have local agencies, regional agencies, provincial agencies, federal agencies, non-profit agencies and crown corporations all using taxpayer dollars to increase the flow of business, people, investment and commercialization in our province. But the level of duplication and inefficiencies is astonishing, with no overall leadership, coordination in planning or true accountability for results. If we are serious about performance, which I am, we should be making this topic a provincial imperative, with the leadership and courage to overhaul our system. It starts with redefining the role of government – the provincial level should be focused on policy, strategy, program selection, funding and measurement and leave the doing to the local level, and at the local level there needs to be accountability for performance.

Today, I am extending my hand and urging the various institutions in the Edmonton Metro Region, including the provincial government, to be guided by our provincial interest, and to reshape the economic development and innovation system to what is needed for our future, and leave behind the ineffective systems and structures of our past. We need to create a much better environment that encourages entrepreneurism and investment, and we need to do it now.

I want my children to grow up in a prosperous Alberta like we all did. I don’t want them to be part of the first generation of Albertans who are worse off than their parents. I don’t want them to be part of a province that is wasteful. I want them to be part of a province that works better together. Twenty five years ago I had a professor of Alberta Economic History who told me that, over time, our province will create more wealth than anywhere else in North America so long as we always believe in two things: (1) That the future can always generate more wealth than the present; and (2) That every one of us has a personal and a moral responsibility to make it so.

In my three years with EEDC, we have turned this organization into a very well-functioning machine. I am proud of our Board, our executive team and our staff that made that transition. But it would be negligent; it would be a disappointment, if we couldn’t take that passion and understanding of performance to the regional and provincial level in an attempt to get the whole system working better.

 

CALL TO ACTION

So in the end, these issues aren’t so much political or economic; they’re personal.

I oversee a team of 700 people. That’s 700 families, many of which are new, young parents. Every month we get together for a town hall meeting that we call The Way Forward. We talk about our business, and the economy and life – what we need to do to be better than ever before, and what we need to take personal responsibility for. We operate with a set of values: Public Stewardship, Selfless Approach, Lead the Way; Make an Impact and Care About One Another.

Today, this is our town hall meeting, Our Way Forward. We talked about the history and the values that have served this province well, and the desperate need to create an environment that heightens entrepreneurship and attracts investment.

We each have an individual responsibility to stop complaining, to increase our investment in innovation, to explore revenue opportunities in new markets, to drive down costs, to support major event, to attract new conferences and to get busy making this province the best it can be.

Let us join in a new determination – to rebuild the foundation of our economy; to work together; to act responsibly. Let us do so with the most profound respect for ideological differences, but let us never forget that what we do today will forever impact future generations.

I believe this province will regain its potential, and out of this extended period of darkness, better days will come.

 

Thank you.