It’s The Economy, Stupid

Manitoba was the only Canadian province that was competing with New Brunswick to attract call centres in the early 1990s. By the mid to late 1990s every province in Canada was trying to attract them.

Manitoba is now out front its the data centre attraction efforts.

A number of large data center operators are evaluating Manitoba, Canada as a possible location for major projects. Why? Cheap, renewable energy, and tons of it. With power costs driving many data center site location processes, and corporate mandates for “green” facilities, the central Canadian province’s ample supply of affordable hydro and wind power is attractive. Large power customers in Winnipeg paid an average of 3.6 cents per kilowatt hour in 2007, cheaper than the average rate in virtually every state in the U.S. except Idaho, as seen in our chart of state-by-state energy prices. That’s all clean, green power from Manitoba Hydro, which generates power from 14 hydroelectric generating stations throughout the province. Not green enough? Manitoba Hydro also purchases the output of a 99-megawatt wind farm in St. Leon, Manitoba to augment its hydro generation capabilities.

New Brunswick cannot compete with Manitoba with its power rates. I don’t know what the exact cents per kilowatt hour are in New Brunswick but suffice it to say it is at least 50% or more higher than Manitoba for large industrial users.

And that would translate into possibly several million a year in savings in Manitoba for a large data centre.

It would seem to me that peripheral places like New Brunswick should make every effort to be a low cost power location. It should be relatively easy way to generate competitive advantage (no pun intended).

That is why I must reiterate my concern over the strategy to generate power for the export market. The real strategy should be to find a way to develop competitive power rates here and market that advantage to data centres, large manufacturers, forestry firms, etc.

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Here is the podcast version of It’s the economy, stupid for March 30 - keep the feedback coming.

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I don’t know what I like worse, outright naivete or pragmatism. The folks pushing for ’self-sufficiency’ have almost no real grounding in reality. SS has become a generic term. However, the New Brunswick Union of Public and Private Employees’ resignation that New Brunswick will always be a have not problem and taking the Bernard Lord position of wanting ever more Equalization is even more frustrating.

Once again, this is an organization with highly vested interest, taking a common sense (from their perspective) position. They argue for hiring more and more public sector workers on a population that is in slight decline. In order to do this, they argue for more Equalization.

No one ever asks the question why do we need thousands of more public sector workers now than 10 years ago - with no increase in population. And the union wants more.

What is really needed, of course, is more sanity. We need to provide good governments services but the growth in spending can’t keep outpacing the growth in the economy. We need to work towards more economic self-sufficiency because, regardless of the union’s position, Equalization will eventually be a dead end.

Eventually, the New Brunswick government budget will be twice the Ontario budget - per capita. It’s just a matter of pure economics. That cannot continue in perpetuity. Either we will fix our structural economic challenges or some external force will impose a change.

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KPMG is out with their 2008 version of the international cost comparison called Competitive Alternatives. I was waiting for this as the 2006 version confidently intoned that Canada’s competitive cost advantage would hold all the way to an 85 cent dollar. Now it’s at par and we still are ‘competitive’.

But there is value to this type of analysis.

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Just got back from the roast of Francis McGuire - the former Deputy Minister of Economic Development under McKenna and for awhile my boss (at least way up on the chain). He’s a good guy and I am happy for him.

But an old colleague mused in conversation that if things had stayed on the trajectory, New Brunswick would have been far, far ahead in its economic development that it is today.

His logic - call centres to IT outsourcing to data centres etc. Waffle manufacturing to auto manufacturing, etc. An evolutionary path. We convinced IBM, Xerox, UPS, FedEx, etc. to put their call centres here - the next step would have been more value added stuff.

But I don’t know. Nothing follows a linear trajectory. Service New Brunswick was the absolute leading edge in eGovernment in the mid 1990s and now, I am told, that in Eastern European cities you can get a smart card to pay for the bus and other city services with one microchip. You can pay for parking your car in a city lot with your cel phone. In Eastern Europe.

We need a new line of trajectory. We can learn from Francis and Mckenna for their hustle and can-do attitude but we also need to think bigger. We need to invest in infrastructure. We need to imagine how can keep our power rates competitive to sustain and attract industry. That gang wasn’t about investing in the future. It was about getting through the recession of the early 1990s. It was about selling what we had (the call centre value proposition) not about real investments in building a broader value proposition for our economic development.

Consider Mercedes-Benz. I wrote the proposal for the Mercedes auto plant in 1994. It eventually went to South Carolina - with a $200 million ‘incentive’ package that basically involved building the infrastructure that the company needed to move there (extending runways, training the people, free land, etc.). New Brunswick would never have done anything like that. Not then. Not now.

And as for Mercedes? 15 auto plants have set up in the southern US since then with several hundred billion in new investment and tens of thousands of jobs.

And one other late night stat for you to chew on. Since we ‘lost’ (meaning never really tried) the Mercedes plant, there has been over $6 billion in Employment Insurance payments to people in New Brunswick - mostly seasonal EI payments to pay people not to work. We had an opportunity in the mid 1990s at the front end of Canada’s longest sustained period of economic growth in its history (14 straight years without a recession) to really get it done. And we didn’t. Now we are on the tail end of that economic boom, with a declining population, rapidly increasing government spending and almost no new private sector economic development (with the limited exception of the energy thing in SJ).

Good night and good luck.

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NBT makes good contributions to this blog. Sensible stuff. He/she is correct that Ireland reduced ’statism’ and that contributed to the economic resurgence but let’s not make sweeping statements.

This chart is taken directly from the 2006 Irish Development Agency annual report. I know it is tiny but I don’t know how to make it bigger. If you can read the note it shows the definition of “Cost per Job Sustained”. This includes “all IDA expenditures to all firms in the period of calculation“. From 1991 to 1997 the IDA made direct expenditures to firms (grants, training subsidies, free land, etc.) of 20,218 Euros (about $32,000 CDN) for every job created. By 2000 to 2006, that # had dropped to 12,485 Euros (about $20,000 per job CDN).

Now, just for comparison, Business New Brunswick provides about $7,500/job for the average call centre job. Of course, the taxes paid on the Microsoft jobs in Ireland are way higher than the average call centre in New Brunswick but I think you get my point.

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Funny stuff. The forestry sector* in Ontario is about 1% of the provincial GDP. It’s about 8% in New Brunswick. Pop quiz. Which province Ontario or New Brunswick has taken these steps recently?

Capped power rates for pulp and paper mills at a highly competitive rate.

Is proposing to reduce the stumpage rate for poplar hardwood by $2.76 per cubic metre to match the white birch rate, effective April 1, 2008.

Implemented a variety of tax-based incentives for the forestry sector.

Ding. Ding. Ding. Pat yourself on the back.

*Including:
Forestry and logging [113]
Wood product manufacturing [321]
Pulp, paper and paperboard mills [3221]

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Or maybe not….

We all love to debate the merits, morality, legality, efficacy, etc. of the government using taxpayer funds directly to attract industry. From their perspective, they are looking at an ROI (return on investment). For example, if we give a company $5,000/employee they hire to train new workers and we get $25000 back in taxes paid over 8 years, that is a good ‘ROI’. There are also rationale arguments against giving incentives.

My position is well known - if you read this rag very often. I think that governments should use incentives when it makes sense - to lose a good project because Quebec or Alabama coughs up more upfront goodies - on some quasi-moral grounds - doesn’t make sense to me.

But after a little chat this week with someone closely involved with this stuff, I have to issue a major qualification to my position. Major.

I don’t think you can ‘lead’ with incentives. In other words, if the main reason why companies are coming to your community is the ‘incentive’, then I think the naysayers are right. The company will use the incentive and then, likely, leave. If the underlying economics don’t make sense and you are levelling the playing field with government cash, that’s a losing proposition. However, I do agree that this has been done on some occasions.

I think incentives are something put on the table after you are shortlisted. Most of the big investment projects I have studied got to a ’short list’ of jurisdictions (in other words, a list of areas where the economics and other factors made sense) before even having a serious discussion about tax breaks or free land or training grants or infrastructure funding.

The underlying business case (energy costs, labour costs, availability of labour, R&D capacity, business/industrial park infrastructure, transportation infrastructure, workers’ compensation rates, legal/regulatory environment, access to supply chain, access to markets, etc.) must be favourable before even considering ‘incentives’. And, I might add, governments should work on the former rather than the latter.

You can’t bait good companies with incentives. You can attract bad ones. Anyone who has been in economic development for any length of time has seen ’shoppers’. Companies shopping around a project looking for large government incentives upfront (most likely because the private sector won’t touch it). But those are doomed to fail (9 times out of 10) and governments should avoid them.

Economic development departments, supported by good government policy, should be competing directly in sectors where there is a strong business case to locate in New Brunswick. If there are no sectors where there is a strong business case to locate in New Brunswick, then Houston (or should I say Fredericton), we have a problem.

Incentives come later.

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The Canada Foundation for Innovation (CFI) has announced another wave of R&D funding. $22.5 million in total. New Brunswick is getting about its usual share:

Universite de Moncton one project at $48,000

UNB one project at $115,000

0.7% of the total funding

Consistency. That’s what we look for. Consistency.

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For where your treasure is, there your heart will be also.
-Matthew 6:21

Anybody know how many new economic developers have been hired by the province in the past couple of years? I haven’t looked at it in several years and at that time, there had been a deep cut.

I know they announced 42 new social workers and have hired literally thousands of health care and education workers in the past 8-9 years?

How many economic developers?

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