The Innovation Journal: The Public Sector Innovation Journal, 5(2), 2000, article 1d4.
Is Innovation a Question of Will or Circumstance?
An Exploration of the Innovation Process Through the Lens of the Blakeney
Government in Saskatchewan, 1971-82
Edited by Eleanor D. Glor
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Central Secretariat-Based Change: Managing the Potash Take-Over
John S. Burton
During the 1970s, the Government of Saskatchewan undertook daring new initiatives in the management and utilization of potash resources. The potash industry, developed in the 1960s, was looked on as a boon to the provincial economy. A period of difficult years for the industry brought serious problems and unusual government initiatives to alleviate the situation.
The overriding objective of the government was to ensure that development of the resource would serve the best interests of the province and bring maximum benefits to its people. When the Blakeney government took office, its' initial approach was to manage the immediate situation and overcome current problems. Despite the commitments to explore the feasibility of bringing the potash industry under public ownership in the government's platform (1), a longer term strategy was then developed which emphasized taxation as a means to ensure adequate returns to the province while taking a much more cautious approach on ownership. The more dramatic move to acquire ownership of facilities took place only when the first strategy failed. It was an unprecedented initiative in the resource field where Canadian governments had always been very cautious. A combination of skilful political leadership and careful management was crucial in achieving goals.
In opposition, the NDP had been quite critical of the actions of the previous government. The new NDP government proposed fundamental policy changes on many matters, including potash, in its election manifesto and was firmly committed to implementation.
The government addressed potash issues soon after assuming office, setting the objective of promoting stability in the short term while determining a longer term course of action. Only gradually did the government become more involved in potash affairs. How best to accomplish goals, particularly without industry cooperation, was not always clear. Policy evolved over time and was influenced by events not foreseen at the outset. This resulted in a course of action by the government which, while an option, had not been originally anticipated.
Molot and Laux (1988) have written about the events themselves, but management of these events also deserves special attention. This chapter addresses the way in which affairs were managed in order to achieve goals and the way in which external events, some unpredicted, were managed. Appendix I describes the status of potash in Saskatchewan in 1969.
A Crisis - Too Much Potash
Potash markets did not yet require the huge increase in productive capacity that came on stream within a very short space of time in the late 1960s. The result was a dramatic drop in prices. Some mines with less secure markets were in danger of shutting down or closing permanently. Premier Thatcher declared, "Seldom in the economic annals of Canada have we seen such responsible companies get in such an economic mess". This comment ignored the role played by the government in encouraging over-development.
By 1969, Saskatchewan's potash industry faced a full scale crisis. At that point the Liberal government, at the request of the industry, introduced its potash plan, involving production controls (prorationing) written into regulations and an understood floor price. It effectively established a cartel in the industry. While cut-throat competition was eliminated thus avoiding plant shutdowns, it also left the Saskatchewan industry as the residual supplier in world potash markets. The federal government expressed concerns about the constitutional aspects of the plan, but in the end made a political decision not to challenge the Saskatchewan government's actions.
During this period, the NDP, then in opposition, was very critical of the government's actions. It pointed to job losses, foreign control of the industry, concessions to the industry, low returns to the province and poor management by the government.
The New Government - Initial Steps
On June 23, 1971, the New Democratic Party swept into power with a large majority. Its comprehensive election program dealt with potash and related resource issues. The new government formed a small Cabinet of ten Ministers, with the Minister of Mineral Resources, E.R. Bowerman, also functioning as the Minister for the newly designated Department of Northern Saskatchewan. DN constituted one of the major priorities of the new government (see chapter 5); consequently, it often required the full attention of the Minister.
The only staff in the government familiar with potash affairs were officials in the Department of Mineral Resources. New staff engaged by the incoming government had to give priority attention to a host of other matters. Hence, departmental staff were relied on for support services. They consisted of personnel who were technically competent, who in some cases had been with the government for many years, whose outlook was professional, but who in some cases regarded the department as a service agency for the private sector. As the events of the 1970s unfolded, it became clear that some were having difficulty in coping with the significance of what was happening. For many of them, the philosophy underlying New Deal for People and its program was totally foreign.
The government reviewed the potash prorationing plan and decided to continue it on an interim basis. Potash producers met with the Premier, praised the prorationing program and requested the government to continue it. In October 1971, the government invited the potash industry to comment on prorationing and its administration. The government asked the industry for its unqualified support if in its opinion the program should be continued. The response was totally favourable.
In December, the government announced the program would be continued and changes were under consideration that would base the formula on productive capacity only rather than capacity and market share. The government also indicated its support for a proposal for a producers' marketing organization for off-shore sales. The Minister stressed the need to increase overseas sales, the merits of a marketing board or organization, his dissatisfaction with government revenues from potash, the continuation of prorationing and price stabilization, and support for a strong producers' organization. The government was seriously looking at a provincial marketing board for potash.
Shortly after, a new Minister of Mineral Resources, Kim Thorson, who had been elected in a by-election was appointed. Following his appointment, a detailed proposal for changing the prorationing program was circulated for comment. Most of the industry responded favourably with one notable exception - a company that would lose some allocation because it benefited from the existing formula due to a large firm marketing arrangement. Later the Minister spoke to the Saskatchewan Mining Association and emphasized again the government's interest in marketing of potash.
On May 23, 1972, potash prorationing fee regulations were passed setting a fee of 60 cents per ton of potash product. The industry accepted this move. This was followed on July 1 by changes to the prorationing formula to base it on productive capacity only. The one company that had opposed this change most vigorously reacted quickly with a court action that was turned down.
On October 24, 1972, the Minister spoke to another mining meeting and referred to suggestions he had made about buying the mine that was objecting to the new prorationing formula. He went on to describe the government's outlook in terms very near those contained in New Deal for People. On December 11, the company objecting to the prorationing formula commenced a court action to have the prorationing regulations declared ultra vires. It was clear that the situation was heating up.
In meetings and conversations, Premier Blakeney pointed to potash as a resource with great potential for Saskatchewan and wanted to see a policy developed that would serve the province well not just in the immediate future but on into the 1980s and beyond. He felt the need for more in-depth work to be done on potash. Late in 1972, I was engaged in the central agencies, first in Finance and then in Executive Council, to examine resource policies. I am an Economist and former Member of Parliament. Special attention and priority was to be given to potash. Liaison was to be established with the Department of Mineral Resources and the matter was to be discussed with the Minister.
The Minister reacted sharply to this development and it took some time before matters were sorted out. He felt that the Department should manage affairs and that there was no need for others to be involved (see also Gruending, 1990). In spite of this setback, liaison was established at the staff level and preliminary discussions commenced.
After some delay, a Cabinet Directive was issued instructing the Department of Mineral Resources and myself from Executive Council to prepare a report on a broad range of potash matters. It was also arranged that I would attend all meetings between the Department and the potash industry. I was identified as the Premier's representative or as a representative of the Premier's office. Industry officials of course took note of this development immediately and began to make calls on me as well as on the Department.
Extensive discussions took place between Mineral Resources and Executive Council and after some time, a report was submitted. It was not unanimous, however. While some areas of agreement were reached, there were some significant points of disagreement remained including the analysis of the existing situation, taxation and the feasibility of public ownership. The report was submitted with separate comments on areas of disagreement.
The need for changes was becoming evident however. By mid-1973, the Minister of Mineral Resources announced that some changes would be made in the prorationing program because of government dissatisfaction. Concern was also expressed about Saskatchewan's share of world markets.
This was followed by a meeting with industry representatives on August 30 when government concerns were discussed and new proposals were presented. The government wanted to change the prorationing formula to provide more incentives for marketing, requested the submission of individual financial statements and expressed a desire for more revenues. Industry wanted to keep the prorationing program in place until the end of the fertilizer season on June 30, 1974. Following discussions and further analysis, it was decided to leave the prorationing program unchanged, to increase the prorationing fee to $1.20 per ton on October 1, 1973 and to collect financial data from each company.
In the latter part of 1973 and early 1974, the first energy or oil price crisis developed and absorbed a good deal of time and resources within the government, competing directly with potash for attention and priority. About this time, however, an Economics Professor at the University of Saskatchewan, A. Paus-Jenson, attracted attention with his commentary on potash affairs. Executive Council personnel held discussions with him, met jointly with him and the Department of Natural Resources, and he was subsequently engaged to conduct a further study of potash taxation and other related matters. His report proposed a new tax on potash reserves rather than on production. Such a tax would not be in contravention of the royalty rate guarantee given the potash companies earlier, by the Liberal government. This report set the stage for a key component of the 1974 policy announcement.
The 1974 Potash Policy
Late 1973 and early 1974 produced a number of developments: potash markets and prices improved dramatically; the proposal for a tax on potash reserves was studied intensively and found acceptable with one modification; further studies were conducted on the future outlook for the potash industry, the role of potash in the Saskatchewan economy and the feasibility and advisability of greater government involvement in the industry; the court action concerning the prorationing regulations continued; and potash companies refused to submit individual financial statements. In addition, the federal government reversed its earlier stance of non-involvement in resource affairs and took an increasingly pro-active and aggressive position with respect to both resource management and revenue. This development came to a head in the federal budget on May 6, 1974 when provincial royalties were made non-deductible from taxable income for federal tax purposes. The budget was defeated and an election was called, but this was not the end of the matter.
A Cabinet shuffle in Saskatchewan also brought a change in the Mineral Resources portfolio. The new Minister, Elwood Cowley, was more aggressive and bold in contrast to the cautious stance of the previous Minister.
On April 29, 1974, the government outlined its proposed new policy to the potash industry. The main features of the policy were public participation in production; public participation in marketing (royalties in kind in the short term); changes to the prorationing formula (upper limit to the guarantee); dropping pricing provisions in the prorationing program; and increased returns to the public treasury through the new Potash Reserve tax. Companies were again requested to submit individual financial statements. The response of potash producers was quite predictable. They rejected both the Reserve tax and the proposal for public participation. A series of meetings was held with the industry but no agreement was reached.
On October 23, the government announced its new potash policy. Its principal features included the following. First, introduction of the Potash Reserve tax. The overall level of tax was reduced 29% from the original proposal, so it would yield approximately $45 million dollars compared to $63 million in the original proposal. Second, industry expansion was encouraged as a result of world market conditions. Incentives were built into the Reserve tax structure and the government indicated its willingness and interest in participating in expansion programs. New mines were to be developed with the government either as a major shareholder or as the full owner. Third, all restrictions on production under the prorationing program were lifted and mines were to be licensed at full capacity. Fourth, the price feature of the prorationing program was removed.
The significant feature of this policy was that the government was more cautious about public ownership of the industry than New Deal for People suggested. Instead, it gave priority to taxation as the principal means for ensuring the public interest. Public ownership of mines was likewise approached with considerable caution. The studies had concluded that there were significant problems in getting involved in ownership and that if public objectives could be met through taxation and other measures, it would be a preferable choice.
Throughout this period, both Mineral Resources and Executive Council staff worked intensively on potash development. Generally speaking, Mineral Resources staff were more cautious and reluctant to undertake new initiatives while Executive Council staff pressed for more aggressive positions. Needless to say, this resulted in tensions and disagreements. At the political level, the government seemed willing to let officials go through this exercise and then deal with the matter, although, on occasion, impatience was expressed about why more study was always required. More study required was of course another way of saying that agreement had not been reached.
At this stage, the federal government came back on the scene. The federal Liberal government was re-elected on July 8, 1974 after its defeat in the May budget. On November 18th a new federal budget confirmed the policy of not allowing royalties and other provincial taxes to be deducted from taxable income. Before the year end, the Saskatchewan government announced that all royalties paid to the province would be deductible from taxable income in calculating the province's share of corporate income tax.
This tax action played a major role in exacerbating the potash situation. The companies were caught in the federal-provincial fight. It is difficult to say whether the absence of this factor would have made a major difference in the conflict between the provincial government and the industry. It did play a significant role in the situation for a period of time, however. Eventually the federal government modified its position. In the meantime, the contradiction existed where a mining company producing potash from two adjoining pieces of mineral property, one owned by the CPR and the other by the province, could deduct royalties paid to the CPR from taxable income but could not deduct royalties paid to the province.
Ongoing liaison was maintained with the federal government on a number of resource issues but it did not appear to materially alter federal actions. The situation became even worse when the federal government took the unusual step of joining the potash company trying to have the prorationing regulations declared ultra vires as a co-plaintiff and not just as an intervener. This was directly contrary to the commitment made by the federal government to Saskatchewan in 1969 that it would not try to overthrow the plan.
The potash industry late in the year made announcements about cut backs in expansion programs totalling $200 million. These deferments were suspect since most had never been announced.
1974 ended with considerable tension between the industry and the government. Both the province and the industry were further frustrated by the actions of the federal government. The tax position of the federal government made it extremely difficult if not impossible for the province and the industry to negotiate a settlement. In addition, the industry did not seem to understand how to deal with a government that was not willing to buckle under to them as so many had done in the past.
As the confrontation between the government and the potash industry grew during the summer of 1975 and as the government moved towards the position of taking strong action, a special Cabinet committee on potash began to take shape. At first, this was an informal group of key ministers in the picture. When it was decided to pursue the nationalization option seriously, a formal committee was established which met regularly until the new policy was in place. Elwood Cowley, then Finance Minister and formerly Mineral Resources Minister was chairman. Other members included current Mineral Resources Minister Ed Whelan as well as Roy Romanow and Jack Messer. Premier Blakeney played an active role on the committee during key discussions.
Potash Corporation of Saskatchewan - First Version
Early in 1975, the Potash Corporation of Saskatchewan was established by Order-in-Council under the authority of The Crown Corporations Act. It was to serve as the instrument for that portion of the government's new policy concerning ownership and as a potential vehicle for managing receipt of potash in kind.
The Chairman of the Board was a long-time civil servant, David Dombowsky, who had served in a number of senior government positions and more recently headed the Saskatchewan Economic Development Corporation. He was regarded as an excellent negotiator and had a good track record in the public service. Other members of the Board were all senior civil servants including the two top officials in the Department of Finance, (Garry Beatty, Roy Lloyd) the Chief Executive Officer of Government Finance Office (Donald Ching) and myself.
The new corporation recruited three senior officers with executive experience in the potash industry and a small office was established. Existing mines were canvassed to determine interest in joint ventures. When negative responses were received from all concerned, PCS began to explore other options.
Mining rights were obtained to property in eastern Saskatchewan near Bredenbury. This property had already been identified as the most likely site for the next mine. Feasibility studies were undertaken using a well known engineering firm with much experience in potash mining. New state of the art techniques were adopted and a first class mine was ready for development. Planning for the mine had reached a critical point in August 1975 when decisions would have to be made. At that time, however, other events intervened which changed the course of affairs.
The 1975 Impasse
In February 1975, potash producers presented a brief opposing the Potash Reserve tax and made an alternate proposal suggesting a scheme whereby all levels of government would take no more than 50% of pretax profits. This was followed by a meeting with the Premier. Discussion centred around the question of a fair rate of return to the industry but there was disagreement about the numbers. Agreement was reached to set up a joint government-industry committee to overcome the numbers problem as a first step in resolving the situation. The industry also pointed out that the non-deductibility of provincial taxes from federal income tax produced a negative result for them when they raised prices. The government agreed to make temporary adjustments to resolve that problem.
On May 2, the joint industry-government committee met for the first time. Government representatives were officials from interested agencies. Significant progress was made on both long term and short term problems. Both sides agreed to meet again as soon as the industry prepared some proposals. The industry was to prepare written proposals on certain issues and government members would respond to the submission. In the middle of June when nothing further was heard, a government member of the committee contacted an industry member to determine when the industry would be ready to meet again. He was told that the industry side was not prepared to meet. Shortly after, on June 20, the potash producers launched a court action against the Reserve tax and refused to pay the quarterly instalments then due. The action required a complicated statement of claim on complex legal matters that obviously took considerable time to prepare.
In the meantime, the Potash Reserve Tax regulations were amended in order to offset the adverse effects of new federal tax laws previously noted. Then on June 23, another federal budget allowed partial deductibility of provincial royalties of up to 25% of production income after operating expenses and capital cost allowances. Letters to the industry from the Minister of Mineral Resources in August demanding payment of outstanding sums produced no response.
In September, potash producers applied to the courts to have the taxes paid under a court order rather than under the legislation involved. In that way, the companies suggested they would be sure to get their money back if the tax was declared unconstitutional. The courts turned down the application. Later, most of the producers launched another court action to have the prorationing fee declared unconstitutional.
During the summer, an interdepartmental committee of officials reviewed the situation and made a number of recommendations to the government on actions that might help to resolve the impasse. These activities were cast in the framework of making the existing policy work. There was a growing realization that something major would have to be done but such decisions could only be made at the political level.
The situation facing the government in the summer and fall of 1975 can be summed up in this way: the companies wouldn't pay their taxes; they wouldn't submit financial statements so a more precise analysis could be made of impact on individual producers; they stopped submitting standard information on production and other matters; they refused to expand in the face of growing world markets; they were asking the courts to strike down the prorationing regulations they had previously supported; and they launched court action against every single tax measure introduced by the government. A back down by the government would reduce its revenue position to the 2 1/2% royalty on gross value.
Time for Decisions and The Bunker Room
Over the summer of 1975, it became clear that the 1974 policy was not working and that something would have to be done. The government was insistent on securing greater returns from potash but was prepared to negotiate changes on the basis of hard information. The potash companies became quite intransigent by not paying taxes, by withholding all information, by challenging all government actions in the courts and finally by not even being prepared to meet.
Thinking within the government was that a settlement would eventually be reached with the industry and that the government through PCS would develop a new mine at Bredenbury, thus ensuring Saskatchewan's share of market growth. As the summer progressed, however, it became clear that the only thing the potash companies would now accept was a complete withdrawal by the government of all actions taken since 1971.
At that point the government began to consider seriously the option of acquiring a position in the industry through more aggressive means. Without ruling out other choices open to the government, necessary preparatory work began this option. Work on the new Bredenbury mine was suspended. A task force was assembled consisting of the members of the PCS Board, two of the executive staff of PCS (the third one withdrew), the potash expert in Mineral Resources, legal and clerical assistance, and special assistance by the Deputy Attorney General. Working arrangements were established whereby the Chairman of the Board acted as the CEO and each person was assigned an area such as finances, valuation of assets, legislation, international implications, marketing, corporate planning, public relations, operations, etc.
One other question remained. Where would they work? Utmost secrecy was essential. A plan was devised to deal with the matter. Room 43 was the entrance to a suite of offices in the basement of the Legislative Building. It was right across the hall from the office of the key Minister to whom the task force reported. The suite happened to be empty at the time but there were plans to locate an agency there. The problem was - how to tell the Department of Public Works that the offices were needed for something else without arousing suspicions about what was going on.
A cover story was developed whereby Public Works was told that the province anticipated the federal government was going to introduce wage and price controls and the province wanted to be ready for it. (A story that turned out to be true!) Elaborate security measures were taken. Each task force member was given a key to Legislative Building doors so they wouldn't have to sign in after hours, each one maintained their own office elsewhere, they didn't eat together in the cafeteria, they weren't seen together outside the office and curtains were drawn when evening meetings were held. Room 43 became The Bunker Room.
The task force reported to a committee of ministers and often the Premier was involved in meetings. The deadline was to have the option ready before the session of the Legislature opened on November 12th. The staff worked long hours, held many meetings with the ad hoc Cabinet Committee on Potash and undertook travel as necessary for further investigations. The job was done and Cabinet had the fully fleshed out option for purchase and/or nationalization before them as one of the choices they could make.
In spite of all this work, however, the government did not take a final decision on what to do until just before the session started. Having made that decision, there was no turning back.
The November 1975 Potash Policy
The new potash policy was announced in the Speech from the Throne opening the first session of the Saskatchewan Legislature after the 1975 election. The government announced that as a result of the impasse with the potash industry, legislation would be introduced to enable the government to nationalize part or all of the potash industry.
This announcement sent shock waves throughout the potash industry, through Saskatchewan as a whole and made national news. Following the announcement, the Premier held meetings with various interest groups to explain the government's actions. Care was also taken to liaise with the federal government. This included a call from the Premier to the Prime Minister.
Two pieces of legislation were introduced. One was the Potash Development Act and the other was to incorporate the Potash Corporation of Saskatchewan under a special Act rather than through the authority of the Crown Corporations Act. Widespread compliments were received on the care with which the legislation was developed and the manner in which it took account of international ramifications. The legislation, however, had a rough ride in the Legislature. The opposition parties mounted a sustained filibuster against the bills and they were not approved until near the end of January 1976.
The government indicated that it was not its intention to acquire all of the potash industry. The obvious questions then were How much? and What is meant by the term part?. The standard response became anything up to 50%. The government also announced that it intended to try to acquire potash assets through negotiation and that the legislation would only be used as a last resort. In the end, The Potash Development Act was never used and all assets were acquired though negotiation. During the time that the bills were being debated in the Legislature both Ministers and staff devoted a good deal of time to preparations for the start of the new Potash Corporation of Saskatchewan.
The New PCS
Following passage of the legislation, the new Board of Directors was appointed. A Cabinet Minister was appointed Chairman and one other Minister was included on the Board. Some of the previous members were reappointed, additional people from government service were added and a well known financial analyst from Ottawa was named. Later, a prominent businessman from each of Regina and Saskatoon together with a well known Saskatchewan Wheat Pool delegate were added to the Board.
The previous Chairman of the Board was appointed President and several members of the task force were appointed to management positions. Recruiting commenced for other key personnel with particular attention to skills required for the negotiation of acquisitions. Another area of concern was personnel for marketing. The new corporation got a break when it was able to recruit a competent person who had been with the first mine purchased by PCS. Head office would be in Saskatoon, near several existing potash mines.
The Potash Secretariat
The mandate of the Potash Corporation of Saskatchewan was to acquire potash assets, mine potash and sell it within the framework of government policies for potash. The Department of Mineral Resources also had a mandate as the manager of the resource. However, there were a host of other matters requiring attention and careful management as a result of the government's policy initiatives. Thus it was decided to set up a Potash Secretariat with a small group of people with particular skills, knowledge and experience of value in managing potash affairs.
Preparation of speeches on potash, news releases, statements, a booklet on potash and other related activities were one focus of this agency. This was considered of some importance because it was clear that the government had not won the battle of public opinion when the legislation was in debated in the Legislature.
Another area of focus was external relations. Close liaison was maintained with the federal government and especially, the Department of External Affairs. This was of particular importance when the United States government sent an Aide Memoire to the Government of Canada on Saskatchewan potash affairs. This move by the USA was designed to protect US interests in the matter including corporate investment and was also a response to pressures undoubtedly being placed on the US government. Canadian External Affairs was very supportive of Saskatchewan interests and responded in a way that was fully satisfactory to Saskatchewan.
Numerous trips were made to the United States by the Director of External Relations in the Potash Secretariat. Discussions were held with various United States government agencies in Washington. In addition, contacts were made with fertilizer interest groups and presentations were made to the US National Farmers Union and mining organizations.
The Secretariat also monitored closely a US Anti-Trust action in which a number of Canadians including the now deceased former Premier Thatcher were identified as unindicted co-conspirators. Careful management of this issue was necessary to avoid export problems for PCS in the future.
The Potash Secretariat existed for only a year. In early 1977, it was disbanded because there was no longer a need for a special agency to deal with outstanding matters.
PCS - Growth and Development
It took some time before PCS actually went into production. As a result of early enquiries, Duval Corporation (Pennzoil) with a mine west of Saskatoon, indicated an interest in selling. Negotiations were undertaken along with other related activities and on October 29, 1976, Duval sold its mine to PCS.
Further contacts and evaluations were undertaken and by the early 1980s, PCS had acquired mines at Rocanville, Lanigan, a partial interest in the Allan mine and potash property near Esterhazy with a mining arrangement with the owner of a mine there. PCS then owned more than 40 per cent of the productive capacity in Saskatchewan.
The head office was located in Saskatchewan, sales headquarters was in the province, research and development programs were undertaken, emphasis was placed on procurement in Saskatchewan and expansion programs were undertaken.
A strong and dedicated management team was built up together with a strong corps of technical personnel. The esprit de corps within the corporation was excellent.
The Board of Directors took strong positions on matters of corporate interest. It maintained a clear understanding that there was also a larger shareholder interest, however, represented by the government on behalf of the people of the province, which at times might override strictly corporate interests. For example, it might be determined that capital expenditures could not be as large as the corporation might desire. Communication channels were through the Crown Investments Corporation (the holding company that oversees all commercial Crown Corporations). This never caused a problem prior to 1982; the relationship was recognized.
After a time, the private potash companies recognized that they would have to come to an accommodation with the government and discussions commenced. The government assigned personnel in central agencies with technical skills who could work with Mineral Resources in negotiations with the companies.
Once PCS was in operation, information was available to demonstrate that potash mines were generally quite profitable. After extensive discussions, a series of Potash Resource Payment Agreements were signed with each company which remained unamended until 1989.
The Innovation Process
The innovation process in a central secretariat of Executive Council, dealing with a major government initiative was both more political and yet in some ways very cautious. Despite the platform's position to nationalize potash, the initial and consistent intent of the government was not radical. Rather, the inability to come to any kind of resolution with the industry led to a more transformational solution than would otherwise have been employed. In the end, the legislation that permitted nationalization was not used: Forty percent of the industry was not ultimately nationalized, but purchased. The complex attempts to resolve the issue created a 72-step process! This process was characterized by cautious, incremental steps and clear, consistent and honest communication and negotiation with the industry. It also encompassed strategies to overcome departmental weaknesses, anticipatory planning and swift action when ready. The skills utilized were technical, negotiating, planning, legal, communication and implementation skills.
A number of conclusions can be drawn from this experience. First, the government started out with a general policy objective, certain ideas on how to achieve the objective but ended up on a course of action different from that earlier contemplated. Second, the potash mining companies used very poor judgment in responding to pressures for change and had little understanding of their status in relation to the role of government. Their conduct was in sharp contrast to oil and uranium companies which generally co-operated with government in managing affairs.
Third, the Saskatchewan government had to demonstrate considerable ingenuity and adaptability in dealing with affairs. Adequate management at certain junctures was crucial to a successful outcome-poor management might have been disastrous. Political leadership on major issues together with competent and dedicated management were both essential components for the successful achievement of public policy goals and objectives.
Fourth, the intrusion of the federal government into the situation complicated matters greatly. This resulted in federal-provincial conflict and to some extent the mining companies were caught in the middle.
Fifth, at the conclusion of the exercise, Saskatchewan's potash resource was serving the province's interests better than at the outset. Sixth, the Potash Corporation of Saskatchewan demonstrated that public enterprise could function efficiently and effectively contrary to the assertions of detractors. It has also demonstrated a full ability to function in world markets. Seventh, major change such as occurred with potash is often difficult to achieve but can be accomplished with sound policies and good management.
Since 1982, the state of affairs has changed dramatically. Potash Corporation of Saskatchewan (PCS) is no longer a Crown corporation, a victim of the Conservative Government's privatization program. It is now Potash Corporation of Saskatchewan Inc. with the majority of shares owned in the United States of America.
The sequence of events is complex. From 1976 until 1981, PCS earned a healthy surplus annually. From 1982 on, it operated with large losses. There is no doubt that even with the best of management, earnings would not have been as high from 1982 on. (Some management changes were made shortly after the change of government.) A major reason for the losses involved costly expansion programs that were continued in the face of severely deteriorating market conditions. Another reason was the Conservative government's insistence on a dividend to the provincial treasury when PCS was operating at a loss.
Early in 1982, while the NDP was still in power, PCS decided that it needed to achieve deeper market penetration in the prime market area, the USA, which consumes over two thirds of Saskatchewan potash. PCS was not getting an adequate share of the market. In addition, an industry marketing organization, Canpotex, that was originally supported by the government, and that handled all offshore marketing was, in the view of PCS, not developing offshore markets aggressively enough.
The strategy adopted by PCS was twofold. First, it adopted a very aggressive marketing position by deciding that it would withdraw from CANPOTEX and establish its own offshore marketing organization and further that it was prepared to compete by dropping prices as much as necessary to gain more market share. The second component of its strategy was to embark on a major expansion program at one of its mines so that it could overhang the market as necessary with additional supply.
One of the first acts of the new Conservative government in May 1982 was to cancel the withdrawal from Canpotex. This then made the expansion program redundant. At the same time, market conditions for potash in general began to deteriorate: Market forecasts which had previously been very buoyant suddenly became very gloomy.
Although the expansion program had already began, management recommended that it be mothballed. Instead, the new government decided to continue the program because it was the only major development program then underway in Saskatchewan. PCS became saddled with a huge debt that eventually required a provincial rescue.
By 1988, PCS became a candidate for the government's privatization program. The necessary legislation was approved in 1989 and the government together with PCS and Crown Investments Corporation proceeded to develop an elaborate privatization plan. The final stages of the privatization plan were rushed into place just as the change of government was going to take place which brought the NDP back to power following the 1991 election. It is estimated that $441 million was lost to the government and its agencies as a result of the privatization plan that was implemented. Events had proceeded too far for the new government to halt the process when it assumed office, so it went ahead.
The privately owned operation is now functioning quite profitably thanks to the efforts of those who created the Crown corporation and ensured that it started the process of rationalization of Saskatchewan's potash industry as well as guaranteeing that benefits to the province were maximized. The latter benefit can no longer be assured.
Since 1991, provincial finances have been such that they precluded any thought of initiatives in potash.
Appendix I: Potash-The Resource
While potash was first found in Saskatchewan in 1942, it took some years to determine the extent and nature of the reserves. Much of the basic geological work defining the resource was done by the Government of Saskatchewan, which determined that Saskatchewan had the largest naturally occurring potash deposits in the world, possibly as high as 40 per cent of total world reserves. Only the former Soviet Union has anything near the same amount.
Potash occurs in layers in underground salt beds covering much of the southern third of the province. The more northerly portions of the deposits occur at levels that can be mined by conventional mine shafts. Further south, potash occurs at deeper levels making solution mining the only feasible way to recover the mineral economically. Most potash rights are owned by the province but some are privately held.
Over 95 per cent of potash is consumed in agriculture as fertilizer. Potassium from potash, together with nitrogen and phosphorus are the three most important nutrients essential for plant growth. The remaining five per cent is used in the chemical industry for industrial purposes.
The Development of Saskatchewan's Potash Industry
During the late 1940s and the 1950s, the Saskatchewan Government gave considerable attention to the question of potash development. In 1947-48, a proposal was made to the federal government for joint exploration and development, which was turned down. The province did not pursue the idea of Crown development any further because of lack of finances, problems with some earlier crown ventures and lack of expertise in the industry.
A decision was made to rely on private sector development. One mine was started in the Unity area in the early 1950s but had to be abandoned because of water problems encountered in shaft sinking. Two other mines were then started: Potash Company of America (PCA) opened its mine east of Saskatoon in 1958 but it had to close shortly after because of flooding, and International Minerals Corporation (IMC) proceeded with its development near Esterhazy. It also encountered water problems in an underground formation with high water pressure. For some time, it was feared that both operations would have to be abandoned. Finally IMC brought in German technology to cope with the problem and it succeeded in overcoming difficulties. By 1962, it was ready to go into production and shortly after, PCA at Saskatoon was also ready to resume production.
The Saskatchewan government introduced a system of potash royalties that were about 2 ½ per cent of the gross value of potash. This level was similar to royalties in New Mexico, the other major potash producing area in North America. Royalty levels were guaranteed until 1981 for the two companies that overcame the water problem and for all other future operations until 1974.
Other companies were interested in development and held mineral leases but most activity was suspended until the water problem was overcome. The one exception was the Kalium (PPG) mine between Regina and Moose Jaw which opened using the solution mining method. By 1964, another company announced plans for development at Lanigan and a group of companies was readying plans for a mine at Allan.
At this time, the government changed. The CCF (now NDP) which had held power for 20 years in Saskatchewan was defeated by the Liberal party in an election April 22, 1964. The Liberals led by Ross Thatcher won the election in part because of criticism about lack of economic development. This was therefore a priority for the new government.
Potash was an obvious area for urgent attention in pursuing this goal. The government encouraged and pressed all interested companies to develop mines. In the process of doing this, it extended the guaranteed low royalty rates to all potash producers from 1974 to 1981. In addition, at one point, the Premier indicated that companies not announcing plans by a certain date would not have the benefit of the extended period of low royalties.
Thus by late 1967, a total of 10 mines were either in production or under development. Each operation was primarily concerned with its own corporate interests. By the late 1960s, all 10 mines were either in or near production. The result was predictable: the growth in productive capacity outstripped the growth in market demand.
1. The New Deal for People included the following commitments:
- End the present government collaboration in a potash cartel that restricts Saskatchewan output and jobs. Because the present owners have generally shown unconcern about jobs for Saskatchewan miners, and because they have used their power to force farmers to pay exorbitant fertilizer prices, an NDP government will consider the feasibility of bringing the potash industry under public ownership....
- We have faith in Saskatchewan people. We believe them capable of developing their own resources for their own benefit. Outside help is sometimes necessary, but a sellout is not. Development must be aimed at maximizing benefits for people - not maximizing profits for big business and its promoters....
- Oppose any further sellout of our resources. With respect to new development, the NDP will give first priority to public ownership through crown corporations. Co-operative ownership will be encouraged. Partnership arrangements between government and co-operatives or private developers will be undertaken when appropriate. Limits will be established with respect to foreign equity capital, and every effort will be made to limit foreign investment in resource development to non-equity capital....
- Review existing royalty and other arrangements with a view to renegotiating, where necessary, those not in the interests of Saskatchewan people. Where feasible, we will reclaim ownership and control of foreign- owned resources.
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