Economic Development Incentives
Posted May 9, 2014
The government has promised a new approach to economic development. It is not yet clear how well this is going to work.
The history of government handouts is littered with poor choices, and scathing reviews by the auditor general. Under the John Hamm government these were done through the Industrial Expansion Fund. The NDP government replaced that with the Nova Scotia Jobs Fund. This turned out to be a change in name only.
The Liberals have now closed the Jobs Fund to new business and established Invest Nova Scotia instead. Will this and other decisions on economic development result in substantive change? It is too early to tell.
According to the press release the Invest Nova Scotia Board
“could provide economic development incentives from the Invest Nova Scotia Fund for sector development or economic diversification, workforce skills for competitiveness, applied research and development and pilot projects, trade, gateway and economic infrastructure, leveraging significant investments in new technologies or expansions and regional development with emphasis on high-unemployment areas.”
As written these words could allow for almost anything. Most of the poor choices by the previous government could be fitted into one of those categories. So the wording of the regulations will need to narrow the focus.
As a practical matter Invest Nova Scotia will not be able to do anything until a board has been appointed and regulations drafted to provide criteria and processes for its decisions.
Support will be provided by staff from the department of economic and rural development and tourism (ERDT) and the deputy minister will be a non-voting member of the board. This ignores the Traves report recommendation that staff support for the Jobs Fund, which Invest Nova Scotia replaces, should be independent.
In principle the minister and cabinet will not be involved although the deputy could be placed in an awkward position if asked to communicate their views to the board, or to guide staff toward choices favored by cabinet.
The key provision that distinguishes Invest Nova Scotia from its predecessors is that money can only be spent if approved by the independent board. If well qualified individuals are appointed, the criteria for spending choices are sound, and staff support operates free from political influence, the Invest Nova Scotia structure could work well.
It is intended to complement the activities of other agencies, whose focus will be narrowed. It seems likely that NSBI will cease to do new venture capital (VC) investments, and Innovacorp’s VC’s will be restricted small early stage placements. This would be a wise direction for policy.
The primary development tool for NSBI will be payroll rebates. It will continue to be an occasional lender but its loans are interest-bearing and have averaged less than $10 million per year so this is not a large risk factor for taxpayers.
In other words, so far so good. But some important questions remain unaddressed.
For example, some of the best economic development spending in Nova Scotia has been the initial and subsequent supports to Michelin, resulting in thousands of valuable jobs in rural Nova Scotia. Typically new investments in technology or capacity have been supported by the province contributing 12% of the capital cost. Premier McNeil has made this more difficult in future by repeatedly assuring us that there would be no more “grants”. How will regulations accommodate Michelin without opening the floodgates to proposals from weak companies with poor prospects?
More worrisome is how government will respond to crisis situations. When Scanwood, a furniture manufacturer in Dartmouth, came pleading for funds in 2010 the government lent it $4.7 million even though NSBI had turned them down. Scanwood went bankrupt a few months later, so the province lost the money and the jobs.
Likewise Bluewave Seafoods received a $500,000 emergency loan last August only to go bankrupt in November. The unsuccessful efforts to salvage Bowater in 2012 cost $50 million.
In each of these situations cabinet didn’t have, or in the case of Scanwood chose to ignore, a decision from a board of knowledgeable business leaders.
It is troubling that the Liberal platform, having noted the poor choices then said that “We need to ensure that government becomes the lender of last resort.”
Under the Liberal plans none of the independent agencies appears to have a mandate to respond to crisis situations. They may therefore be dealt with at the cabinet table in the same ad hoc fashion as before. This is contrary to the spirit of the Traves recommendations and likely to produce more poor choices.
Taxpayers will want to watch closely as the picture becomes clearer. Do the regulations provide the Invest Nova Scotia board with precise criteria for making choices? Are staff supporting them able to act independently? Is the board well qualified? Have duplications between the various agencies been eliminated? Will decisions to bail out failing companies be subjected to the same kind of transparency and independent oversight?
We will only know if there has been real change when we have answers to these questions.