This document summarizes three white papers about diversifying Alberta's economy. It discusses how Alberta's economy has become too reliant on oil and gas and needs to adapt to attract investment in new sectors like technology. The capital markets currently funnel most investment to oil and gas instead of other opportunities. Reforming the capital markets could redirect local savings of $2 billion per month currently invested outside Alberta to invest in local growth opportunities. This would help strengthen sectors like technology and diversify the economy, similar to how public investment helped develop the oil sands sector originally. The third white paper proposes an "integrated pathway for technology" to help new businesses in Alberta.

1. Contact :the authors
Robert McGarvey Joe Batty
rmcgarvey@shaw.ca battyj@telus.net
780.433.6323 604-824-5713
Diversifying the Alberta Economy
2nd
of 3 white papers
Capital Markets Reform

2. [Capitalizing Intangible Assets] | 2
Overview
Alberta’s economy is facing its most trying circumstances in decades. With oil prices collapsing, major projects
delayed or cancelled and capital disappearing from major sectors of the economy, there is a compelling
urgency to address the underlying problems. The challenge we face is to find new ways to diversify the Alberta
economy and, in the process, reduce our dependency on the volatile oil and gas industry.
Governments have been promising Albertans a more diversified economy for decades. Yet, despite multiple
attempts, little meaningful progress has been made. Evidence suggests that past diversification attempts have
failed because governments have either been too deeply involved in diversification (picking winners, owning
businesses outright) or too distant (simply leaving diversification to the market). Both of these strategies have
failed to achieve significant progress.
Our analysis suggests that the heart of the problem is structural and that diversification of the Alberta economy
must begin with fundamental reforms:
1. Adapt to the new economy: The economy has changed in the past 50 years; Alberta’s banks and other
financial institutions have not kept pace. Many of Alberta’s most exciting growth opportunities are
technology-based. That is, they are underpinned by patented inventions, copyright, software and
services. However, Alberta’s financial infrastructure has not adapted to these new assets, undermining
the free flow of capital. As a result, various sectors of the Alberta economy, including the technology
sector, are undercapitalized and therefore underperforming in the market.
[White paper No. 1 outlined the growing importance of intangible assets and presents a methodology to help
technology companies overcome this deficiency.]
2. Reform Alberta’s capital markets: Capital markets are out of sync with the new economic reality.
Unfortunately, an overwhelming bias has developed in Alberta’s capital markets, funneling investment
toward oil & gas, property and unproductive stock market speculation. Approximately $2 billion a
month in managed investments (RRSPs, TSFAs, pension and mutual funds) leaves Alberta to be
invested on Bay Street or Wall Street. Capital market reforms could redirect some part of this capital to
local businesses, allowing Albertans to make direct investments in investment-ready opportunities that
help diversify the Alberta economy.
[White paper No. 2 investigated ways to reform capital markets to encourage more direct investment in Alberta.]
3. An Integrated Pathway for Technology: Diversifying Alberta’s economy means doing things
differently, but these new approaches also need to be supported by a commercial ecosystem, an
integrated pathway for technology. The third, and final, white paper in our series outlines some of the
most common management challenges facing technology companies and other SMEs (small- to
medium-sized businesses). The key objectives of management in this role are to prepare the
opportunities for commercial success, in other words, get them market-ready but also insure they’re
investment-ready, properly structured to receive an investment and deliver a return on investment.
[In this white paper we outline a pathway for launching new and exciting businesses in Alberta, creating entire new
industries and diversifying the economy.]

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Executive summary
Capital markets are out of sync with Alberta’s new economic reality. Over the past few decades, an
overwhelming bias has developed in Alberta’s capital markets, funnelling investment toward the energy
industry as well as the booming real estate and stock markets. To diversify the Alberta economy, the structure
of capital markets needs to change so that they can adequately serve all sectors of the Alberta economy.
With the collapse of oil prices, conventional wisdom suggests that Alberta needs to do more - make more
concessions - to create an attractive investment climate for institutional investors. In fact, the secret to
diversifying Alberta’s economy starts at home, with Albertans investing locally in their own future.
There is a significant amount of locally generated savings that could be employed in such an effort.
Approximately $2 billion a month in managed investments (RRSPs, TSFAs, pension and mutual fund
contributions) leaves Alberta to be invested on Bay Street or Wall Street.
We need some new thinking to keep these resources working at home. Resurrecting the spirit of the Great
Canadian Oil Sands (GCOS) would be good start. GCOS was a publicly supported, private sector initiative in the
1960s that was financed in large part by Albertans. Its success opened the door to oil sands development, which
then drove billions of dollars of international finance into Alberta’s energy sector.
Implementing similar initiatives in Alberta’s technology sector could create a legitimate pathway to
commercialization for Alberta innovation. Making targeted reforms to Alberta capital markets could change
the direction of capital flows in the local economy. Doing so would allow Albertans to invest directly in
‘investment ready’ opportunities, help strengthen the technology (and other underperforming) sector and
begin to diversity Alberta’s economy.
It’s time to get serious about diversifying Alberta’s economy
It’s taken some time to get there, but even diehard purists admit the Alberta economy needs rescuing. The big
question is, what can we do to improve the situation?
According to Kevin Page, University of Ottawa economist (and former Parliamentary Budget Officer for
Canada), a major impediment to growth in Canada (and now Alberta) is the lack of investment. Investment in
Canadian industries other than resources and property flat-lined years ago at very low levels, leaving many
sectors of our economy undercapitalized. With commodity prices at historic lows, Canada (and Alberta in
particular) needs to change gears.
The solution is to stimulate local investment through the reform of our capital markets.
What are capital markets?
Capital markets are trading platforms for the buying and selling of equity and debt financial instruments. In
addition to the Toronto and New York Stock Exchanges, there are a host of secondary and specialist markets,
both public and private.
It is often said we in the developed West have highly sophisticated well-functioning capital markets. In fact, one
of the most popular myths in modern capitalism is that stock markets exist to connect the world’s capital with
companies needing capital to grow their businesses, build factories, launch products or hire staff.
This is almost entirely false.

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In Canada, there are trillions of dollars in invested capital, including retirement savings plans, and pension and
mutual funds. The majority of this capital, however, is simply “placed” in the stock market. Placing money in
the stock market is NOT investing; it is passive speculation (essentially, placing a side bet on the economy).
Placing is not true investment because it doesn’t provide cash resources for companies needing capital for
growth. Most stock market transactions simply swap one existing (passive) stockholder with another, the
money circulating in a great vortex amongst these shareholders at ever-increasing speed. Almost none of this
placed capital ends up in the treasuries of companies needing capital for growth.
(Capital flight is built into our capital market structure)
Canada’s chartered banks are supposed to augment capital markets through their corporate finance function.
But Canada’s banks have almost completely abandoned this important sector of the debt market.
Why? Most of the exciting new growth opportunities today are in the new economy, and their assets are
intangible. These non-traditional assets are not capitalized on company balance sheets. And even if they were,
banks have yet to design processes for them, meaning these assets cannot be used for lending purposes.
Therefore, lower-cost bank finance is only available to those companies that need it least, and is not available
to early stage technology firms and others that have growth potential. (Our first white paper deals with
intangible assets and how to overcome this problem)
While it is true investment bankers do occasionally underwrite private placements or IPOs (Initial Public
Offerings) for technology companies, most often only part of the capital raised goes to the company. Large
amounts of the invested capital goes to bankers in the form of fees and instant returns on the ”free trading”
shares that they and their privileged partners are selling into the market on the day.
Consider the Facebook IPO in 2012. After the company listed its shares for sale on the stock market, it sold an
initial offering of shares to the public to raise working capital. However, of the 421.2 million shares put on sale
that day, only 180 million were treasury shares where the proceeds of the sale are made available for the
company. The majority of the shares sold in the IPO were the private shares of privileged insiders, like CEO
Mark Zuckerberg, New York-based private equity investors like Accel Partners, and the company’ s investment

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bankers, Morgan Stanley and Goldman Sachs. Of the roughly $16 billion raised on that day, $9.2 billion (57.5
per cent) went to insiders.
For Alberta businesses lacking the profile of a Facebook or the allure of oil and gas in its glory days, capital
markets are closed. If your company is not investment grade (something that only mature public companies
can claim), you’re out of luck.
But there is another side to this capital markets problem - the investors. Most savings today are invested
through middlemen, in mutual funds or with wealth managers of one kind or another. This financial services
industry, which did not exist half-a-century ago, now manages almost $64 trillion worldwide, the vast majority
of invested capital in the economy.
We’ve known for a long time these middlemen were expensive, but few investors realize just how expensive
they are. According to Gina Millar of the True & Fair Campaign, (a UK-based initiative to improve transparency
in the investment industry), apart from AMC (annual management fees, MERs in North America), there are 13
additional hidden fees that operate on investment returns, like compound interest on debt.
The extra fees make a significant difference. For example, the JPM UK Dynamic Fund reports annual
management fees of 1.59 per cent, but with hidden fees, the final tally is 3.27 per cent. City Financial UK Equity
Fund reports 1.5 per cent management fees, but with hidden costs their rate is actually 5.57 per cent – and these
are typical of the industry worldwide.
These percentages seem quite reasonable at first glance; even a largish five per cent management fee still
leaves the investor 95 per cent, doesn’t it? That’s not the way it works. In an economy that’s generating (on
average) a 10 per cent return on invested capital, a 3-5 per cent compounding fee structure basically
expropriates for middlemen one-third to one-half of all gains in the economy.
Reforming our capital markets could help solve both of these problems and help diversify the Alberta economy
by directing much needed capital to undercapitalized sectors of the economy (technology, manufacturing and
rural business opportunities). It would also provide Alberta investors with better returns by allowing them to
self-direct some part of their savings locally, into approved investment opportunities in their own back yard.
What can the Government of Alberta do?
The Government of Alberta could take a leadership role in changing this unhealthy commercial reality as it
affects Albertans. We could do worse than learn the lessons of our own past.
Historical Financing Case Study: Great Canadian Oil Sands
In the early ‘60s, the Government of Alberta (under Premier Ernest Manning) defied conventional wisdom when
it launched the Great Canadian Oil Sands (GCOS) project. At the time, conventional oil and gas was on the
wane in our province. So the Government of Alberta got innovative; far from leaving our future to the market, it
worked with experts in the oil industry to define a workable business solution that would unlock the potential of
the oil sands. The result was a publicly sponsored, private sector company called Great Canadian Oil Sands.
It was clear at the time that global capital markets (Investment banks and other institutional investors) would
not finance an unproven unconventional crude oil venture, so GCOS went directly to the people of Alberta.
Individual Albertans were invited to invest in their own future. More than 100,000 Albertans (representing
roughly 27 per cent of Alberta households at the time) purchased $1,500 debentures ($11,000 in 2015 dollars),
taking an equity position in Alberta’s future. This was a lot of money in 1962; consider that the average house
price in Alberta was $12,500!

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Following this successful (primary) financing, a Canadian subsidiary of U.S.-based Sun Oil Company, entered
the picture, investing an additional $250 million to get the project up and running in Fort McMurray.
Some deemed it "a daring venture into an unknown field" and "the biggest gamble in history." It was (at the
time) the largest, single private investment in Canada’s history. Great Canadian Oil Sands successfully
constructed and operated the first commercial oil sands plant, with production beginning in 1967.
Today, Suncor, the successor to GCOS produces of half a million barrels of oil per day, almost 23 per cent of
Alberta's total oil sands production.
Historical Financing Case Study: Alberta Energy Company (AEC)
Incorporated in September 1973 under the authority of the Alberta government, AEC was to be a locally owned
energy company. Like the GCOS venture before it, AEC was a government sponsored private sector initiative
designed to accomplish both economic and a political goals. AEC’s mandate encompassed a variety of roles for
the company in oil and gas, pipelines, forestry, petrochemicals, coal and steel. But then-premier Peter
Lougheed felt that Albertans should be doing as much of the upgrading and refining of its crude oil as possible.
Therefore, the larger mandate of AEC was to seed the development of entirely new industries, like petro-
chemicals, and develop more high skilled, high-paying jobs in the province.
But it was equally clear that AEC was designed to give average Albertans investment opportunities, so they
could share in the oil and gas boom.
The AEC was financed in much the same fashion as GCOS. The province invested $75 million (half the initial
capital) and then sold another $75 million in shares to 60,000 Albertans. AEC eventually went on to merge with
PanCanadian Energy. The combined companies renamed themselves EnCana, which went on to become a
significant player in the Alberta economy.
As Premier Ernest Manning found in the ’60 and Premier Peter Lougheed in the ‘70s, patriotism is a very
powerful incentive for Albertans to invest in their own and their children’s future.
Helping Technology through the Starvation Zone
GCOS and Alberta Energy Company are useful models of private-public partnership that changed an
unfavourable market reality in Alberta. But before a government sponsored capital markets initiative can be
launched, we need identify the problem it would be designed to fix.
One of the reasons technology is hard to finance in Alberta is most technology ventures are trapped in the
financial Starvation Zone. (The federal Department of Western Diversification calls this Death Valley).
What is the Starvation Zone? It is the financial black hole that technology meets when it emerges from the
laboratory. Having developed in a fully oxygenated university environment, for example, the young technology
entrepreneurs encounter a world where bank doors are closed and where alternative sources of capital, like
angel investor networks and venture capital, are extremely limited.

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Early stage technology ventures lack access to capital markets or banks when they need it most. As a result,
technology companies approach venture capital to obtain the resources they so desperately need. Too often, a
venture capital success most often involves the sale of a world-class technology to a U.S., Chinese or South
Korean venture firm at pennies in the dollar, and the loss of opportunity for Alberta. (For more details see our
first white paper – Capitalizing Intangible Assets)
Creating a living biosphere for Alberta innovation
Technology commercialization needs its own nutrient-rich commercial biosphere. This protective environment
wants, first of all, the raw material of innovation but it also needs access to vital nutrients, including expertise in
commercialization, production, channel access, global marketing, sales and finance to create the conditions for
life.
Clearly, we already have many of the ingredients for this biosphere. Alberta is rich in innovation and has
expertise of all sorts, including business development specialists, technology incubators and related support
services. What it lacks is access to finance.
Fortunately, there is no shortage of money in Alberta.
Alberta’s public sector institutions and Albertans’ RRSPs/TFSAs saving are more than capable of getting the job
done. AIMCo. (Alberta Investment Management Corp), for example, has invested assets of $81 billion. This
Crown corporation manages the Alberta Government and Local Authorities Pension plans and the holdings of
several other trusts. In addition, there are host of other funds, including the ATRF (Alberta Teachers Retirement
Fund) with $11 billion, and the City of Edmonton legacy fund at $ 1.4 billion.
Furthermore, individual Albertans also have significant savings; Albertans have more than $20 billion in TFSA
accounts (TSFAs were specifically designed - tax wise - to finance high risk ventures, but most are languishing in
low-return GICs). Albertans’ RRSP accounts are even larger, with more than $150 billion.

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All told, there is more than one quarter of a trillion dollars sitting in investment accounts controlled directly by
Albertans – enough local savings to make a difference. In addition, the Alberta government has two major
financial institutions it influences, the ATB (Alberta Treasury Branch) and Alberta’s credit unions. Both have
millions of depositors and/or members and have a mandate to help Albertans.
The challenge is how to unlock that financial power.
The Alberta First Fund
The GCOS equivalent for Alberta diversification is the Alberta First Fund. Setting up this locally directed
investment fund could be similar to past ventures, like GCOS or the Alberta Energy Company: a government-
sponsored, private sector capital market initiative specifically targeting investment to Alberta’s innovation and
businesses. The Alberta First Fund could, perhaps, be marketed through ATB and/or local credit unions.
Albertans could finance the Alberta First Fund directly through a debenture or a conventional equity offering.
AIMCo. and/or other Alberta-based funds could participate at the second stage, like Sun Oil did so many years
ago.
The objective of the Alberta First Fund would be to identify and prepare viable local innovation and businesses
for market and second stage investment. In this sense, the Alberta First Fund would be a staging fund,
specifically designed to identify new ventures that demonstrate real commercial potential, and then draw upon
commercial experts in Alberta to ensure they're vetted properly, made market-ready and investment-ready.
The second stage of this capitalization process could involve a members’-only P2P (peer to peer) Community
Investment Platform that allows private and institutional investors to make (asset backed) investments directly
to technology ventures and other growing businesses. This would be an Internet-based debt/equity capital
market specifically focused on Alberta based businesses. The P2P market would present fully documented
opportunities. Investors could participate, possibly through their self-directed RRSP and TSFA accounts. Such
capital market reforms would directly link Albertans’ savings to exciting new ventures in the province.

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What role and return for government?
Like the visionary premiers of the past, the Alberta government could assemble a team of experts to design a
new suite of investment opportunities and/or funds specifically targeted at developing local Alberta innovation
and businesses.
ATB and Servus could be invited to participate, by being the marketing agent for the securities of Alberta First
Fund; after all, they have a mandate to capitalize the Alberta economy and have millions of member clients. A
large percentage of these clients have TFSA and RRSP accounts that are languishing in GICs and cash accounts.
Albertans would be given priority access to the investment and would be encouraged to invest small amounts
from their TFSA or RRSP savings.
The Government of Alberta could further support this capital markets initiative by establishing a CMHC-like
insurance facility that would provide a base security for investors. Seniors, a primary target investment group,
are having to cash in RRSPs in large numbers. They would welcome a government-supported local investment
option to increase their returns and diversify the Alberta economy.
The goal is to fully oxygenate all sectors of the Alberta economy. Initially, the funds will target high margin,
predominately technology based businesses but the intention is to quickly branch out to a variety of other
undercapitalized sectors. The success of this program will help diversity the Alberta economy and establish
vibrant new businesses, with the potential for an additional Alberta royalty regime attached.

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This capital markets solution is, of course, not be unique to Alberta. Governments nationally could encourage
Canadians to take greater personal control over the nearly one trillion dollars in TSFA or RRSP accounts.
Instead of investing in low-return GICs, investors could self-direct some part of their savings in ways that make
a difference, advancing the economic well-being of their fellow Canadians.
One Scenario
Overview
A successful launch of the Alberta First Fund could attract 100,000 Albertans to place $2,500-$5,000 from their
TFSA accounts. This would create a capital pool somewhere between $250 million and $500 million.
Objective
The fund creates a large pool of risk capital that can be used to identify investment candidates, prepare them
for market and complete the high risk scale-up and testing that is typical of innovative ideas. Once these
businesses are commercially viable, specialized management teams would help corporate management
complete the planning to prepare them for second stage finance from Alberta’s P2P platform.
Benefits
If the testing proves the business or technology can be scaled up to commercial use, there are multiple benefits:
 Unleash the Power of Alberta Innovation: we could value-add our economy, help our society solve some
problems and/or, for example, provide our health care system with new tools to diagnose and treat
diseases.
 Create Opportunities for Investors: Alberta First Fund investors would receive better-than-average
returns on their money.
 Support Alberta-based financial institutions: ATB and the credit unions would attract new depositors
and/or members and would be earning fees on for their marketing services.
 Bank Customers: These same institutions would be helping businesses become bankable. As they
mature, they’ll be new commercial customers.
 Diversify the Alberta Economy: A thriving technology sector would provide a counter-cyclic industry
sector in Alberta. It would also provide a vital hub for creative technologists and related professions in
Alberta.

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About the authors
Robert McGarvey: Robert is a consultant economist, geologist and co-founder of the
Genuine Wealth Institute of Edmonton. Over the course of his career, he has held a
variety of senior management positions. Robert began his career as a petroleum
geologist in the oil industry in Calgary, Canada, and went on to become the Managing
Director of Merlin Consulting, a London, U.K.-based consulting firm. Since returning
from the United Kingdom, McGarvey has been the President of Negawatt
International Inc., a Canadian electronics group and Head of Strategy for Beckett
Advisors, a consulting group based in Los Angeles, California.
Robert is a columnist with Troy Media and has been an Executive Committee Member
of the U.K.-based Economic Research Council (ERC) since 1991 (www.ercouncil.org).
Founded in 1943 in London, the ERC investigates economic and political change and
studies their impact on global business.
Joe Batty: Joe is an accountant and associate member of the Genuine Wealth Institute
with a specialty in new asset management. He has a long history in financial management
and is a leading authority on structuring and financing knowledge rich companies.
Joe has held many corporate directorships and senior management positions, including a
three-year tenure as CEO of a Canadian electronics group. During his tenure as VP of
Finance at NAIT (Northern Alberta Institute of Technology), Joe's interest and
involvement in new products and technologies led to his spearheading a technology
transfer liaison program between NAIT professional staff and industry. Two decades
later, the Liaison Program remains a vital source of innovation for Canadian companies.
With more than 40 years of experience in finance and accounting, Joe demonstrates a
proven track record of helping business – large and small – set up financial systems in support of their strategic
goals and objectives. The work Joe has done over the years has made him an authority on the identification,
evaluation, valuation and (where appropriate) capitalization of “Intangible Assets”. His specialty is unique. Every
financial manager today needs to know and understand these principles: The success of their businesses
depends on it.