Flow-through shares represent bad policy that have cost investors more than $1 billion during a recent four-year period, reduced government revenue and distorted capital allocation, argues a new report from the University of Calgary’s School of Public Policy.

The report looked at the returns that investors have earned from flow-through shares, which allow certain resources companies to pass along certain expenses to investors, between 2008 and 2012. It found that investors in smaller firms have lost almost 100% of their investment while investors in larger firms have lost 14% during that period. In dollar terms, investors have lost $1.2 billion of the $2.5 billion invested in these shares, the report states.

Moreover, governments have missed out on an estimated $300 million in tax revenue as a result of these tax breaks, the report points out. Furthermore, the report argues that flow-through shares are distorting the market by drawing capital to the resources sector, which might have been used more productively elsewhere.

“Compounding matters is the very real possibility that those projects that were funded by flow-through shares, but would have been better not begun at all, added competition for inputs and labour, increasing their prices — and lowering returns — for other mining and oil and gas projects with better prospects,” the report says.

“Our overall conclusion is that [flow-through shares] seem to do more harm than good and that the time has come to reconsider the wisdom of providing tax incentives such as [these] for investments in particular sectors of the economy,” the report notes.

“In sum, the legacy of flow-through shares is effectively a list of everything that would indicate the policy’s failure. They have hurt investors. They have hurt economic efficiency. They have distorted market competition — and all at a cost to the federal government of nearly half-a-billion dollars a year,” the report concludes.

“Furthermore, the incentives created by flow-through shares can only run counter to any desires among federal and provincial governments to diversify their economies and reduce dependency on mineral and fossil fuel resources,” the report states. “And even where it remains a goal to increase investment in such resources — or any other government-favoured sector, for that matter — it is clear that flow-through shares or tax incentives similar to this policy mechanism are an extremely poor way to achieve it.”