Structuring deals

For those of you that believe any government incentives to attract industry are an abomination, please click on the top right X of your window and close this posting as I will be dealing directly with that abomination.

I have raised this before but I think it’s well worth a refresh after Halifax announced a major coup yesterday.

The province of Nova Scotia is giving $9.1 million in payroll rebates to the Bermuda-based hedge fund management firm if it creates and maintains 400 jobs over the next seven years.

These jobs all require formal degrees in accounting and some require even more skills. From Census and wage surveys we know that the salary range here will be between a starting wage of around $42,000 going up to $80,000 or higher.

PS – I have been adamant that New Brunswick target financial back offices but so far to no avail.

So the comments I have are these:

As far as I know, New Brunswick has not changed its incentive programming in 15 years. If anyone has knowledge of this let me know but if you go to the BNB web site you get boilerplate that reads about “tailoring a customized financial package to meet your needs” or some such rot.

Essentially, the loan/forgiveable loan model has been used almost exclusively since Frank McKenna around 1990 (when I came on the scene).

Meanwhile other jurisictions have evolved. Nova Scotia implemented a payroll rebate incentive program which gives the company ‘cash back’ only when the create jobs. While not a perfect model it makes sense for a number of reasons:

1. No risk to taxpayers. If the company doesn’t create and sustain the jobs, they don’t get the incentive. Contrast that with an NB loan which is paid up front and much harder to get back if the project goes bust.

2. It is easier to draw a straight line for the public as to the value of the project. Company x employees generate $25 million in new taxes for the NS government and we rebate a portion of that to the company. You might argue that a forgiveable loan has similar effect but it is harder to draw that straight line.

3. Companies seem to like it. By my count, Nova Scotia has attracted 2-3 times as many projects as New Brunswick in the last 4-5 years (including VAS).

Overall, I think New Brunswick needs to get much more innovative on this front.

The truth is that any kind of use of public funds to encourage private investment are going to be decried by lots of folks. How dare you give public money to those greedy firms?

But I believe you have to get above ideology on this. The truth is that just about every jurisdiction does it from Alberta to Ontario to Quebec. That’s the blunt truth.

And the question is this. Who needs the jobs more? New Brunswick with its declining population, disappearing communities and ever increasing dependency on Federal transfers or Alberta and Ontario with very strong economies?

You might argue both.

Having said all that, incentive programs such limit the risk to taxpayers (like payroll rebates and and tax incentives which are based on after the fact economic activity). Forgiveable loans or straight loans mean much more risk to the taxpayer. In addition, incentives should be based on a realistic payback for the taxpayer. If you invest $10,000 of my money to attract a firm, you had better get $30,000 back over time. And that is what a good incentive program (like the NS payroll rebate program) does.

I have said before my preference is for programs like the payroll rebate or tax incentives for direct job creation and investment. General tax cuts, the preferred method for Conservatives, doesn’t guarantee job creation and usually are so diffused they have limited impact (unless they are massive like a 50% cut in corporate tax rates). In addition, as I have also stated many times before, we don’t even know where corporations are paying their corporate taxes.

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0 Responses to Structuring deals

  1. Anonymous says:

    Uh, yes we do, corporations DONT pay taxes. In most provinces corporations contribute 3% of budgets. You’re right on about tax cuts, but be real, the liberal have been cutting corporate taxes for years, its not like that is ‘conservative’ ideology. The rich get richer is the motto of both political parties.

    But again, there is a simple reason for this, NB government policy contributes to the one (or at most two) corporate oligopolies. You think Irving just sits around hoping that their power doesn’t fade away? Nova Scotia is beginning to see a healthy mix away from single industry players, that’s the last thing Irving wants.

    However, I do disagree with you on what the ‘people’ want. The idea that people simply nix any idea has no way of being proven because unlike many jurisdictions, there is simply no way of knowing. If people were voting on such issues we’d at least have ideas. The recent referenda in the states two weeks ago showed very large support for taxpayer investments on all kinds of social spending initiatives-and that is generally proven time and again.

    That happens generally when people vote directly for X amount of dollars for X specific purpose, that way they know EXACTLY where there money is going, its not just disappearing, or giving rebates to rich people to buy hybrid cars or new cars for all the government bureaucrats.

    In this case, where you have a government saying it will pay $5000 of the salary of a $24-60 grand paycheque, the taxes they will get back from that will more than make up for it. Another component of that is that IF those workers are getting paid by government, government should have a say in how it is spent, perhaps having a plan to invest X dollars in training other NBers for other jobs. Those conditions will virtually guarantee public support-which is of course why we never hear about it in the press.

  2. Blackjack says:

    Most countries compete on corporation taxes in order to attract investment. They have to. I dont know of many who actually give tax cuts to corporations aside from this. Generally they provide resources such as land, buildings, training etc. and a negotiated rate of general tax for a period of time (generally 7 years) after which the corporation should be able to stand on its own two feet – if it cant then it is not viable anyway. At that point the government either allows the corporation to act independently or it seizes all assets, bank accounts etc and decides what to do from there.
    Irving is a huge fly in the ointment as far as NB goes. It has been allowed to become too powerful and would be dismantled under monopoly legislation in most civilised countries. But is it too late for that in NB? I would argue that it is never too late we just need someone brave enough to stand up to them.
    What we need are REAL jobs paying REAL money and not minimum wage dead end positions with no remote possibility for advancement. I dont think a million dollars a year for 400 jobs is out of the question and I know that there is more than enough unused crown land in NB to cater for many inward investment projects. Unfortunately most of th e crown land is leased to Irving so that explains a lot.
    I believe we need a major overhaul of how we approach things in the province. This cannot be done without a root and branch disinfecting of the infrastructure right down to grass roots level. The Irvings must be brought to account for their rape of the environment and they should be forced off all crown land on a phased basis over an agreed period of time. They will scream and threaten to move out of the province like they always do but you know as well as I that they have too much to lose if they go that way. They can’t pack their refinery onto a flatbed truck and cart it to Maine can they?

  3. Anonymous says:

    I like the cut of the above posters jib. However, I do disagree with the first paragraph. Virtually no government I’m aware of actually carries out those policies. As I’ve said before, of the Fortune 100 80% are heavy suckers of the government teat and many of the largest corporations have been saved from bankruptcy by government, just take a look at Nortel. The amount of federal subsidies and contracts they were given make NB Power look like Microsoft. However, as usual, its all so those people can make massive capital gains and keep their investments.

    The closest thing to the above that I’ve seen was the Bolivian government which finally got tired of the massive rape of its economy and land and indicted, then confiscated assets of, guess who, yes, our good friends and now local investors Repsol. A company found guilty of stock manipulation and currently being sued by their own shareholders. But they’re welcome partners in New Brunswick!

    However, the reality is that ‘grassroots’ never starts at the top. That’s why there is massive propaganda. To actually get somebody to do something takes a lot of work. As for land leases though I think Irving is one of the smaller leaseholders because they own huge tracts, but of course the other multinationals act no different, in many cases worse.

    However, since the theme has gone political, I’ll repeat it again: if there are no mechanisms for political activity then there is nothing people can do. The liberals certainly aren’t going to do that, the only party that would even consider it would be the NDP and even they shy away from Irvings, perhaps explaining why their support has bottomed out.

    Again, in the states when people wanted political change it starte at the grassroots. These things would at least get noticed if we have proportional representation and the NDP and/or Greens had some say, and that 40% of the public that doesn’t even bother voting would at least see that their votes wouldn’t be wasted.

    So anybody reading this join and help lobby Graham to honour Lord’s referendum and then get talking about it to your friends. Most people don’t even know what it is, let alone the fact that Canada is the least representative country in the industrial world, and New Brunswick consistently has the most unrepresentative elections in Canada.

  4. scott says:

    And the question is this. Who needs the jobs more? New Brunswick with its declining population, disappearing communities and ever increasing dependency on Federal transfers or Alberta and Ontario with very strong economies?

    That’s a key point you raised there, David. And IMHO, the tug of war that has gone on for 35 years betweem those regions you mentioned and ours has always been won by the former. Why? Because regional economic development through federal government initiatives [programs] has always come across as regional favoratism. (to those who are excluded) Even if Ottawa truly knows that one region is suffering from regional ecomomic disparity, they will still favour the region that got them there in the first place which, as it turns out, is never the maritime provinces.

    So, in the meantime, I guess we will have to just be content on taking guilt $$$$ from the feds until they decide it is time to treat us [and our unique economic situation] with the respect it deserves.