A poke the eye

As most of you know, I have recently started my own consulting gig after 17 years of working for various organizations. There are costs associated with starting a new business and as a result my VISA card is starting to fill up. Without my prompting the other day, VISA was nice enough to add $7000 more to my credit limit. Aren’t they nice. Youch.

Anyway, I was talking with someone this week about a couple of projects that are being proposed for New Brunswick. In this person’s opinion, both are not economically viable without significant government assistance.

Now, this is the point where I deeply (but respectfully) disagree with many of my colleagues in the economic development business.

In almost every case, I don’t think the government should provide funding for projects that are not viable without it. I am obviously talking about commercial projects here.

For example, there is a fund for companies willing setup or expand in the Miramichi. If there are projects looking for funding under than program that are not viable – in other words, without the government financing the thing wouldn’t go, I think it is problematic to fund them. The problem is simple. When the government funds run out, the project is likely to run out as well.

To tie in with my VISA story above, if you are giving grants or loans at all it is best to give them to companies that don’t need the money.

Now, before you automatically hit add a post and start firing away, think this through. UPS got $10 million from the government in 1994 to set up three separate facilities in New Brunswick in Moncton and Fredericton that created 800 jobs. 14 years later, UPS is still here. They have paid back that grant multiple times over in taxes paid and in philanthropy in the local communities.

UPS didn’t need the money. The project wasn’t contingent on government funds.

I could give you dozens of examples – even when you look at attracting industry to the province. In the investment attraction business, there are ‘A’ clients, ‘B’ clients and ‘C’ clients. The Cs are basically just shopping projects around looking for the best deal but if you look closely at their business plans they are really shaky. The ‘As’, by contrast, are highly sought after firms that pay high wages, are good corporate citizens and have good business models and are likely to stay around for a very long time.

The other thing about these grant programs and unviable business models is that politics tends to get in the way. So you have a grant program (such as the Miramichi fund) and politicians tend to use it (I am not talking specific examples) for local projects and tend to not be so worried about the longer term viability of the project. Think of all the cottage cluster funding from a few years ago.

And then people wonder why so many of these projects go under. They go under because they were in many cases destined to go under.

In my opinion, tax and grant programs should be used to bolster the value proposition and should be short term in nature (i.e. to help with training of staff, etc.). They should not be used to subsidize a business model that could not stand on its own. When that happens, as soon as the government money runs out, so does the firm (in many cases).

I’ll close on this point. There was a term used some time ago (I hope no one is still using it) “lender of last resort” meaning that if no banks or other sources of financing were available, the government would step in as the lender of last resort. That term gives me chills. I understand, I think, where they were coming from when it was coined but they ended up making things worse. Banks are now more reluctant than ever to lend a local business money without government loan guarantees. Government funding has become a way to reduce bank risk.

I think we need to spend a lot more time looking for good, stable firms that will provide long term, good paying (year round) jobs for New Brunswickers – regardless of where those firms are currently located. I think that trying to sweeten the pot so that local ‘entrepreneurs’ can use government money to try out risky ventures, is definitely not good public policy.

Ultimately, this stuff is what gives economic development a bad name.

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0 Responses to A poke the eye

  1. mikel says:

    The above scenario is pretty inaccurate. Take for example the announcement of funding for the company in Moncton that makes packaging. The company is small, but it didn’t NEED the money, the money is used to hire more people. The company could do without it, it could go to the bank, which wouldn’t want them to invest in jobs, but in technological upgrades that make workers less necessary and can help bail out their bottom line since there are numerous tax credits for capital investments.

    So what is the difference between that and IRving getting a loan? The difference is that Irving uses its money for the above reason-which is why so few are now working in the forestry industry. New Brunswickers are PAYING to get fewer jobs.

    In fact, once again you argue against a point you posted before-most states have special programs designed for rural or specific areas, the oil refinery in South Dakota is based on such an example, coincidentally, UPM also built a brand new facility based exactly on the Miramichi model.

    The other argument against it is a simple democratic one. Are you seriously saying that if I am a fledgling startup, putting all my money into creating a new enterprise and hiring local people that ‘by definition’ I am less deserving of government money than UPS?

    First, while there is no evidence that UPS will go bankrupt, there is LOTS of possibility that it will get contacted by some other jurisdiction with a ‘better offer’. In such cases, what those companies do is call up the Premier or Governor and blackmail them into making the deal sweeter. Of course in New Brunswick you can’t even find out what UPS MAY be costing the province.

    That doesn’t even get into the politics of it, remember when the insurance heads of ontario came to visit Bernie and suddenly ‘public insurance’ was off the table?

    IF a fund is being used for ‘political purposes’ then quite simply you use public policy to CHANGE that. How’s this for an example-you no longer get any child tax credits because it was found that somebody was collecting one fraudulently.

    That gets us back to the question about lack of information. Once you have legislation that protects taxpayers money, then just having it ‘in the open’ tends to solve the political pandering problem because people don’t tolerate it. The problem is, finding out how many such cases there are. We find out a few, but actually relatively few.

    In short, Ben and Jerry’s started with government funding, then progressed to bank funding. How much worse or better off do you think the Vermont economy is with or without them? The devil is in the DETAILS, not with the entire program.