ALBERTA HERITAGE FUND INTERPROVINCIAL LOANS

Loans from the Alberta Heritage Fund to other provinces were perceived by many to have been made on generous terms. Announced government pol icy was initially to lend at market rates commensurate with the borrow er, but then, with some ambiguity, changed to a policy under which all provinces would borrow at the rate corresponding to the most creditwo rthy province, Ontario. This paper compares Fund lending rates with co ntemporary market interest rates on publicly issued bonds of the borro wing provinces and Ontario. Results show that Fund lending rates not o nly exceeded market yields on Ontario bonds, bw also the market yields on bonds of the borrowing provinces. Fund lending rates were approxim ately equal to estimated borrowing costs of other provinces, when thos e costs were adjusted for potential issuance costs of public security issues.