Chasing the Jobs
Posted August 17, 2011
The provincial government spends a lot of money on economic development, not all of it wisely.
The provincial government pursues economic development through a number of agencies and departments including the Departments of Economic and Rural Development and Tourism (ERD) and Nova Scotia Business Inc.
NSBI is an agency operating at a short arms length from government with an independent Board of Directors drawn largely from the private sector.
NSBI has an able and hard working staff. They have a clear idea of what they are trying to do and have been imaginative and strategic in many of their choices. The province is fortunate that so many able and experienced leaders from around the province have agreed to serve on the board.
But it operates in a flawed policy context.
- The payroll rebate system is a good way to support employment growth. The money is meted out gradually and only if the jobs are in fact created and retained. It is unfortunate that programs approved by the board, after thorough debate and analysis, need to wait for cabinet approval, which often takes many weeks or months. It makes sense for cabinet to have notice of a decision and an opportunity to intervene if it wishes to be proactive, but it makes no sense to have the protracted approval process. Cabinet’s role should be on policy, not transactions.
- Many of the employers being sought for the payroll rebate program are great strategic choices—for example in financial services, aerospace and defence, information and communications technology. But too often they have been for low wage jobs in unstable industries such as call centres.
- Both NSBI and the Department of Economic and Rural Development use nonsensical “rate of return” measures to evaluate projects. These compare the investment with the expected taxes to be paid as a result of the created jobs. Although the relative numbers are helpful—100% is certainly better than 50% — the suggestion that this is a measure of government revenue win is nonsense. The good jobs that NSBI facilitates are not filled by unemployed aerospace engineers or accountants languishing in Nova Scotia but by people who would otherwise live elsewhere. When they move here they consume the same amount of health, education, and other government services as others, which turns out to be about equal to the taxes they pay for all but the highest earners.
- Neither the government (through ERD) nor NSBI should be in the venture capital business. That business requires a player to be both nimble and hardnosed. They are neither. It is sometimes argued that there are no alternatives, but why would there be if the private players have to compete with a government entity doing deals on less than commercial terms? It would be better for NSBI to act as a facilitator between Venture Capitalists and provincial businesses looking for capital. As it is taxpayers have a great deal of capital at risk for very few jobs.
- Likewise ERD should not be involved in loans. The history of these loans is littered with disasters. It often happens that a borrower, dissatisfied with NSBI’s already soft terms, will go to Economic and Rural Development and get a loan on even softer terms. If NSBI declines a deal it is safe to say that it has a very weak case. Yet government often does the same deal directly using the Industrial Expansion Fund (IEF), leaving NSBI in an impossible negotiating position for subsequent transactions. The most recent example of this was the $4.75 million loan to Scanwood which went into default very soon after it was made, with little prospect for recovery. Not surprisingly the Auditor General has been highly critical of the operations of the IEF while giving generally good marks to the operations of NSBI.
Again NSBI could provide a facilitator role with banks and other lenders, and could even subsidize the interest rate using a rationale comparable to that for payroll rebates. Perhaps some loans for rural manufacturers could be provided by NSBI but a more rigorous approval process is required. Many of NSBI’s largest loan accounts are to organizations that could get money from the banks; many others are going to result in substantial or total losses.
There will be times when it is necessary to contribute to large capital intensive employers such as Michelin (still a frequent receiver of government funding) and DSME in Trenton. But if so this is best done as grants whose cost is reflected immediately rather than loans or equity investments for which the cost is put off to later accounting periods, perhaps after the next election.
NSBI has not done a good job of aggregating and reporting all costs, including rebates, staff costs, and loan losses, weighed against the actual number of jobs created.
The NDP government is no worse than its predecessor on any of these points but neither has it been better. The decision to abolish the IEF appears to be a good one but we should withhold judgement until we see what will replace it.
Ultimately the economic problem being addressed is not the most important one. Over the next twenty years Nova Scotia will lose 100,000 workers. It will be impossible to avoid a corresponding shrinkage in our economy. Our problem is going to be jobs without people, not people without jobs. This can only be mitigated by an aggressive increase in immigration rates, and much better and more vocationally relevant education for our young people.