Getting Value for Money Spent on Economic Development
Posted August 18, 2017
The province spends money on a variety of economic development activities. There needs to be better transparency, analysis of payback, and willingness to act on the evidence.
Nova Scotia Business Inc. (NSBI) continues to focus on export development and on using payroll rebates to attract employers. In 2016-2017, it completed agreements with ten companies for a total potential subsidy of $35 million.
For example, IBM can receive $10 million over several years for creating 250 jobs paying an average of $73,000.
That is not many companies, but they are all in export-oriented sectors. Four of them, representing 80% of the subsidy, are in information and communications technology.
Most companies fail to meet the maximum possible number of hires so the actual cost, and number of jobs produced, is less. The completion rate has improved from 49% to 62% in the last two years.
There is periodic misguided criticism when the payroll rebate program pays money to wealthy corporations. Those are exactly the kind of companies we should be seeking—ones with the financial heft to achieve, and sustain after the payroll rebate finishes, the business plans taxpayers are supporting.
It would be nice if such payments for jobs could be avoided altogether (and sometimes they are) but payroll rebates are the least bad way of competing with programs in other jurisdictions.
NSBI stopped making equity investments after the Liberals were elected. It retains the regulatory authority to make loans, but as a matter of policy, it ceased doing so in 2014.
There was ample evidence of past follies in the recent annual report. It detailed write-offs totalling $26.2 million on loans and equity investments that had been made before the change in government.
Of that, $10.1 million was for four successive capital investments in Techlink, a Cape Breton producer of software for gambling devices such as VLTs. It had no success selling to arm’s-length clients, so why did NSBI persist with further advances?
Another $1.4 million was a loan to Blue Wave Seafoods, $.5 million of which was rushed out immediately before the 2013 election. The company defaulted three months later, having received a total of $5 million of provincial assistance since 1998.
Given this experience, one might wonder why Innovacorp is actively investing in the equity of risky startups. Some, such as GoInstant and Analyze Re, provide big payoffs, but most turn out to be duds, even though only a small proportion of applicants are approved.
That is the nature of even profitable early stage venture capital funds. Innovacorp has not been profitable. It has been making investments since 1996 but most of its 80 placements totalling $51.4 million have been made in the last six years.
The value of currently active companies plus payments received is materially less than that. A change in approach five years ago aspires to result in better returns.
There are some important differences in the way Innovacorp invests, compared to NSBI. For example, over the last two years, 72% of the deals and 91% of the dollars invested have had private sector partners investing on the same terms, which provides independent validation of the choices being made.
Promoting a vibrant startup sector is a worthy goal. It is nevertheless most disappointing that Innovacorp does not publish the data it has on financial performance.
In addition to its incentive payments, NSBI had $14.5 million of operating expenses last year. Innovacorp spent 10.3 million. These amounts are consistent with other jurisdictions but should be continuously scrutinized for overall value delivered.
That will of course only be useful if politicians are willing to make the decisions indicated by the evidence. If only they were.
All parties continue to support the Yarmouth Ferry, whose $14 million annual cost will make a negligible contribution to the excellent tourism year we are having.
Likewise, the film industry, including digital media and animation, will soak up $32.1 million this year—about three times the income tax that will be collected from the resulting direct jobs.
Those jobs will need just as much subsidy every year to be sustained. Otherwise, they will migrate to one of the other provinces that provide the same absurd level of handouts. Yet the opposition parties argued in the recent election campaign that the Liberals aren’t doing enough.
It would be a wonderful outcome if, at one of the meetings of provincial premiers or finance ministers, they could all agree to simultaneously reduce the subsidies to something vastly less.
In the meantime, government should be producing an annual independent report on the value generated by each of its economic development expenditures. As it happens this is in the mandate of the Department of Business:
“Develop goals, targets, success measures, and sunset clauses to ensure that programs/regulations only last as long as they are effective.”
Just do it.
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