Economic Development Discipline
Posted January 24, 2014
No area of government has seen more ill-considered spending than economic development. The Liberals have promised to do better.
So did the NDP when they were elected in 2009. A scathing Auditor General’s report in 2011 said: “The Industrial Expansion Fund has few processes, controls or documentation to support the review and evaluation of applications for loans or other assistance… A recently established Advisory Committee has no oversight role. Confidential Cabinet review and approval is the only significant control or oversight of this program.”
They changed the name to Nova Scotia Jobs Fund but managed to be even worse—not an easy feat.
From the 2013 AG report: “We found deficiencies in all ten Jobs Fund files we tested… Improvements in some areas are overshadowed by missing application information, and project assessments which do not always include required economic and financial analysis… Government may wish to revisit our 2011 recommendation to consider whether the administration of the fund should be transferred to Nova Scotia Business Inc. (NSBI)”
The Liberal government has established reviews of loans, loan guarantees, grants, equity, and payroll rebates. How can the province improve on the sorry track record?
1. Payroll rebates are the best tool. They do not create risks to capital, and we only pay them if the jobs appear. More than half of the possible rebates offered by NSBI go unclaimed because the businesses do not expand as quickly as they hoped. Payroll rebates do not make sense for low paying jobs where the resulting provincial income tax is likely to be less than the rebates.
2. We have been well served by the investment in Michelin plants. Periodically they will need updates to equipment and training, and taxpayers should expect to contribute a small fraction of that cost. The same kind of program should be available to successful smaller manufacturers that are expanding or updating their operations.
3. Most loans to credit-worthy borrowers are much better made by banks, but those borrowers would rather borrow from government if they can get a better rate. If there is a business case for a rate subsidy than government provide the subsidy explicitly. This provides full cost disclosure and limits taxpayer exposure. Just as important the bank will provide much better stewardship of loans that get into difficulty.
Some well-run rural businesses may still have difficulty getting bank credit because their plants have little value except as part of their operations. In those cases a government agency may have to be involved in providing the loans but these need to be carefully managed.
4. Loans or grants to failing businesses almost always end in losses for taxpayers, without saving the companies. They are typically in unprofitable sectors or badly run. If a viable future is possible the best first step can be a bankruptcy procedure, which eliminates the existing debt and perhaps results in new management.
Politicians are deeply attached to their communities and not experienced in making tough business decisions. One of the hardest things for them to grasp is that economic development money should be focused on strong companies, not weak ones.
5. Venture capital investments have been made by NSBI, Innovacorp, and government directly. Almost all have been disappointing as investments, in part because government agencies do not provide strong governance to the entrepreneurs. The more promising opportunities might have fared better with sterner but more knowledgeable equity partners.
6. It is odd that each granting agency seems to have its own criteria, without much integrative thinking. Grant seekers will shop around for the best deal, sometimes successfully playing one agency off against the others.
It would be much better if all funding choices were made in one place.
7. The history shows conclusively that cabinet is the worst place for evaluation of individual transactions. Cabinet should of course approve the policy framework, and receive independent evaluations of how it is being applied. But it should stay out of deal making. As well as being good public policy, this is good politics. The smell of deals gone bad lingers for a long time. Each of the few good ones breeds resentment in all the regions that did not participate.
8. NSBI’s more independent structure has done better, but that is a test against an exceedingly low bar. Its own criteria have been woolly and they have been too willing to chase transitory jobs such as contract call centres. Much stronger standards are necessary.
The advantage of the NSBI type of structure is its entrepreneurial spirit and the knowledgeable oversight that it gets from its independent board.
9. All of this is good theory. The real test comes when a cabinet minister gets a panicky call from a failing employer in his hometown. Or a prominent Liberal phones to complain that the arm’s length economic development agency is impossible to deal with.
Ministers should keep by their bedsides the dreadful history of catering to such appeals. Perhaps they can stiffen their spines with an archive of front page stories on past handouts to Irving, Scanwood, DSTM Trenton, Bowater, Blue Wave Seafoods, and Rainbow Farms. These and many other bad choices have served taxpayers badly and hurt the electoral prospects of the politicians who made them.