It's The Economy, Stupid

My comments in the Montreal Gazette this a.m.   While unfortunate, I do think that some people (hopefully not the opposition) will try and whip up anti-Quebec and anti-French rhetoric to try and scuttle the NB Power deal.   I hope there is rigorous debate – but around the real issues. 

I read the MOU and the broad strokes of the deal confirm that I think it is a good opportunity for New Brunswick.  Some of the language around the amount of power at the L and M rates needs to be fleshed out – I don’t know if 4.5 TWh is the right amount for industrial users for example.

The government has calculated that the rate savings to residents and businesses will amount to $5 billion.

One of the funny things about this deal is the hue and cry about ownership of the electricty grid and generation facilities.   

Fortis (a private company) owns Maritime Electric.

Emera (a private company) owns Nova Scotia Power.

Newfoundland Power is owned by Fortis (a private company).

What did you say about public ownership of critical public infrastructure?

Electric utilities will always be under a regulatory environment and the province writes the regulation but I think it is downright weird for anyone in the other three Maritime provinces to lecture us about the government ownership of our utility when they don’t have government ownership.

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Someone told me yesterday that this whole deal was cooked up by a bunch of large industrial users looking to get cheap Quebec power.

Yeah.  So what?

It always amazes me when people broadly cast the average Joe Q Public as sweet and nice and altruistic and the corporation as manipulative bullies looking to exploit the average Joe Q Public.

Corporations (including the loved small business) want to make decent return on their invested capital.   For large industrial companies, high energy costs eat into their ability to make a decent return on invested capital.  Therefore, it makes sense to pursue public policy that fosters competitive power rates – balanced as alawys against the broader public needs.

We have talked about this many times.  Individuals want to make a ‘decent’ return on their retirement savings and that is why 96% or more of our RRSP and pension monies are invested outside New Brunswick (the provincial government pension monies are 99% invested outside New Brunswick).

Why should we expect anything different from our industrial companies?

I’m not saying that all corporations are great corporate citizens any more than I am saying that all residents are fine upstanding contributing members of society.  But this whole manufactured big business = bad is getting boring. 

In Northern New Brunswick, we have received a little taste of what happens when large industrial companies leave and it ain’t pretty.  I think that fact should be in the back of every politician, journalist and resident mind when considering the NB Power thing or any other public policy that impacts economic development.

We need to be an environment where industry can generate reasonable rates of return on invested capital.  Maybe then we, as residents, will feel more inclined to invest our money here as well.

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It seems like a lot of former Bernard Lord associates have done quite well for themselves.  I gues that whole breach of personal privacy didn’t hurt Chisholm Pothier that much.

Anyway, Pothier brings a point of clarity to the Equalization debate in a letter to the editor of the TJ.
“As a province’s economy gets relatively stronger, its equalization payments may decline. This is how the program is designed to work.”

Now, of course, we all know this.  I just like to hear the head of communications for the federal finance minister confirming that the Equalization program is designed to penalize provinces that are able to generate a little incremental economic development. 

Equalization is the greatest disincentive to provincial economic development.  Maybe that is why the majority of provinces are using the program and why the amounts keep going up each year.

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This is kind of interesting.  Statistics Canada has tabulated the air traffic volume to/from Canadian and U.S. cities.  NYC and Toronto, understandably, is the most used route.  Halifax’s top paired destinations are NYC, Orlando, Boston and Washington.  Moncton makes the list with only two destinations:  Orlando, and Vegas.

Hmm…

Here is the list of top Moncton destinations (to/from total).  It’s a bit depressing that the top four locations are pleasure travel (not business).  it is interesting that Silicon Valley is in the top 10.

Fredericton’s figures are here. Boston is #1 followed by Vegas.  Saint John is here.  NYC, Chicago and Orlando are top destinations.

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I have been watching this whole NB Power drama unfold with great interest.

The media and punditry reaction has been expected – I am actually quite pleased with David Alward’s comments – this would have been a convenient time to pull a “Bernard Lord and the Toll Highway” stance to garner a few votes.  But that little promise has cost the province several hundred million in lost revenue and increased debt service so a reflexive promise to scrap any deal here with similar ramifications – would have been a big strategic error and Alward was smart to avoid it.

I actually have an interesting window on this because I also followed with great interest the sale of NBTel to Aliant and Bell Canada a few years back.  The hope was that NBTel (New Brunswick) could have become a living laboratory for Bell Canada.  That the innovative and creative team at NBTel would be leveraged by Bell leading to jobs and economic development for the province.  After all, Bell had talked lovingly about NBTel – “the little Telco that Could”.  Some of us actually – and naively – thought that New Brunswick could end up as the jewel in Bell’s crown.

The fantasy never materialized and NBTel has been gutted to a local telco service provider.  For my Aliant readers, don’t get me wrong.  Aliant is a good, stable provider of services to New Brunswick and a good employer and an excellent supporter of local communities and charities.   I appreciate that – but they are not developing innovative services here.  Bell has not made New Brunswick a “living lab” and has not set up development activities here.  In fact, hundreds of jobs have been eliminated.

As I have pointed out elsewhere, the NBTel sale was not all bad news.  I did a quick review of New Brunswick’s successful IT firms a couple of years back and almost half them had NBTel ties in some fashion (exNBTeler management, etc.).

So you might expect me to be very reticent to show any optimism about the sale of NB Power to Hydro-Quebec.  As one reader points out, Quebec is ruthlessly self-interested as has been shown many times over.

NB Power is not NBTel and electricity is not telecommunications.   I have a hard time looking into the future and seeing a successful, limited debt NB Power providing cheap energy to industrial and residential clients.   I can’t see a pathway to this and, in fact, several NB Power people have told me in recent years that lower electricity rates in the past were subsidized by not paying down debt in an orderly fashion and eventually New Brunswickers will have to pay the piper.

So we could be looking at a near term future where power rates drive more industrial activity out of the province or at very least are an impediment to future economic development. 

To rework the the book title of the CFR’s Richard Haas, there are political moves of necessity and political moves of choice.  I think NB Power’s sale to Hydro-Quebec is a political move of necessity.

This assumes, of course, that what we are reading about power rates and debt reduction are the reality.  Any deal would need to have an iron clad agreement to treat New Brunswick businesses and residents the same as Quebec businesses and residents. 

There is just no way that NB Power can compete with the cheap power production capacity of either Hydro-Quebec or a future Lower Churchill Falls project.  Because of the huge costs and uncertainty, nuclear is tricky.  Wind and solar are still very expensive and oil or natural gas are likely to become very expensive.  Hydropower is still the cheapest and relatively green source of power and Quebec has this in spades.

Why would Hyrdo-Quebec want NB Power?  Ask Danny Williams.    Buying NB Power would be a strategic move to ensure that Quebec controls access to the lucrative US electricity market. 

Jacques Poitras makes an interesting point over at his blog. It is likely that Hydro-Quebec would end up mothballing certain power production assets in New Brunswick (over time) and that would take out potentially hundreds of high paying jobs.  That is a risk but I would like to think that the New Brunswick government could continue developing its energy policy to promote alternative energy development that would lead to job creation.

In my opinion, governments in New Brunswick have not been very good at long term thinking.  They talk long term (prosperity plan, self-sufficieny plan) but the act very short term.  Because trees take 40 years to grow, the forestry industry needs long term thinking.  Energy supply is also a long term issue.  I would argue that highway transportation should be set in a long term framework as well.

NB Power’s sale to Hydro-Quebec is a long term issue.  Let’s hope that policy makers and politicians get it right.

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Ontario has announced enhancements to its digital media tax credits which supports large, specialized video game developers that are developing eligible interactive digital media games in the province. The tax credit provides certified game developers that incur at least $1 million of Ontario labour expenditures per year in the development of eligible interactive digital media games a 35% Ontario Interactive Digital Media Tax Credit on Ontario salaries and wages.  The changes positions Ontario to become a centre of excellence for the development of digital media by allowing specialized game developers to claim the tax incentives annually.

How dare they develop a program for ‘large’ businesses?    Ontario, Quebec and BC (and to a lesser extent PEI and NS) are battling it out for the digital media industry in Canada.  It will be interesting to see how all these programs will resettle the landscape.

Of course these companies could spare themselves the hassle of trying to figure out who has the best incentive programs and come to New Brunswick to save a couple of points on their corporate tax rate

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As you know my two big themes in economic development these days are value proposition and networks.  The latter builds the former.   If you realize that creating an environment where an industry can prosper requires dozens if not hundreds of various stakeholders, than networks will achieve primacy.  The value proposition depends not just on an economic development agency, or a government department, or an industry association or a group of suppliers or an educational institution or an airport or a highway or a community’s living environment or a tax structure or a building or  – you get the picture.

Communities that will be successful building 21st century industries will be those that understand these linkages and build networks.

But, as I am known to offer more theory and less practice, let me give you a practical example.

I was asked this week about what can be done when you have an industry that has potential for growth but is so nascent that the value proposition is not particularly strong.  How can you whip up interest and begin the animation process of a growth cluster?

We have few examples but the call centre one – that everyone loves to hate – has relevance here.  Beyond NBTel, which was a key animator, the province knew the importance of attracting a few lead players to seed the industry.  CAMCO was one of the first customer contact centres attracted to New Brunswick and they were given $23,000 per job to set up in Moncton.  That is between 2 and 4 times more than the amount given to subsequent call centres.  The point is not the money.  The point is that the government realized it would have to do even more to get those lead anchors for the industry.

Again, this is not just about money.  Governments have a variety of levers to promote the attraction of those few initial industry partners that will anchor a growth strategy.  They could use R&D.  They could use tax-based incentives.  They could themselves be the draw.  A company could set up in New Brunswick as the result of a large government contract (say e-Health or CGI’s eGov) and then anchor a broader growth effort.

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At the JA Business Hall of Fame dinner on Tuesday night I asked a couple of my colleagues to answer a question:  When you look back on this time in New Brunswick (after retirement), what will be your recollections?  Will we be remembering those heady, exciting days when the economy was booming and immigrants were pouring in?  Will we point to the fact that New Brunswick finally broke out – after more than a century?  Will we be talking about the “good old days”?

There was some chuckling and snippit commentary but suffice it to say that there is not much optimism in that group about this time in our history being anything more that mediocre.  One of my colleagues indicated the self-sufficiency agenda could have been such as catalyst but he didn’t see anything really happening after three years.

I can’t really see it either.  I think we may look back and talk about Moncton’s transformation in the 1990s (that is already an example used when I attended conferences in Halifax and Cape Breton recenty) but New Brunswick as a whole? 

Based on what I see right now I think we are in for a period of extended mediocrity.  One of the people I was talking to has knowledge of the call centre industry and thinks that there will be some consolidation and reduction coming.  I have been predicting that although so far I have been proven wrong.  Intuitively as we do more and more on the Web – banking, hotel reservations, parcel tracking, etc. – there should be less need for call centre agents.

The forestry industry is likely to come back but never to the level of the early 2000s (at least not until 2040 or so).  Mining?  The sector that Cecil Freeman said would bring us Alberta-style opportunity?  Maybe but we haven’t seen it so far. 

It takes a lot to build an industry from a few local firms with a few hundred jobs to a global powerhouse employing thousands.  It was done in this province with customer contact centres but beyond that, not much.

With the focus mostly elsewhere, it is unlikely to happen.

But mediocrity is not that bad.  It is better than catastrophe.

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“I’m shocked, shocked to find there is gambling going on in here.”

Upon hearing the news that Avis is closing a 220 person call centre in Fredericton, here is the reaction of Liberal MLA T.J. Burke.

Federicton-Nashwaaksis MLA T.J. Burke says he’s tired of U.S. companies that set up shop in New Brunswick and exploit Canadians when they suddenly pull the plug, leaving hundreds jobless and an economy reeling. “It sickens me, quite truthfully,” Burke said yesterday, reacting to the news that the Avis Budget Group call centre at the Brookside Mall was closing. The call centre employs 220 people. “It’s a pretty big shock … nothing short of a catastrophe,” Burke said. “It’s a giant, gaping hole at the Brookside Mall.”

The timing of the job losses couldn’t be worse, he said, given that the Christmas season is approaching and the economy has struggled lately. “Jobs are scarce enough as it is in this city,” Burke said. U.S. firms establish operations such as call centres in Canada because it’s cheaper, work their employees to the bone and then pull out when things get rough, the MLA said.

I expect this kind of silly rhetoric from local business people who want the government to spend all their subsidy dollars on local firms.  I would expect it from the Opposition and from sniping groups that do not offer any other solutions.  But from a guy like Burke?   This is disappointing.

I have just shown data that 85% of all firms that start in New Brunswick die within 9 years of opening.  Those evil “U.S. firms” that Burke talks about have a 90% success rate in New Brunswick (i.e. they are still in operations – most well after a decade of operations here).

“… work their employees to the bone and then pull out when things get rough, the MLA said”.  Is that MLA Michael Moore speaking?

It is sad and frustrating that Burke would say such things and, in fact, if you want to know why New Brunswick’s economy has underperformed the rest of North America for generations – go ask T.J. Burke. 

It’s exactly that kind of attitude that fans negative public perceptions about large, stable and globally connected international firms.

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Sometimes it takes an outsider to crystalize things on an issue.  I spent an hour this afternoon talking with a U.S. researcher who is studying efforts to lure jobs and investment from one province to another in Canada.  We were chatting about the McKenna years and his highly visible efforts – in the national press – to attract industry.

He told me he completed an exhaustive search of the Lexis Nexis news database and the references to efforts to attract industry to New Brunswick dried up after McKenna left in 1997.  He wondered why and asked me to provide examples post-McKenna.  I thought about it and came up with a few like Molson but on the whole there hasn’t been much activity in the past decade or more.

I did an analysis a few years ago of every BNB press release related to companies moving into New Brunswick or national/international companies here that had expanded with BNB help.  If I recall correctly the period was around 2000 to 2005.  During that timeframe, other than some call centres (VAS out of Chicago dominated) – mostly expansions of firms already here – there wasn’t much in the way of new activity.  I think it was about 85% of all new jobs were call centre expansions.

Since then there have been a few but not many.  A quick scan of BNB press releases today reveals the vast majority of effort is going to retain the companies we have in the face of the recession (retention jobs). 

It’s a tough time to be attracting investment to be sure but many of McKenna’s biggest projects were started in the recession of the early 1990s.

It was interesting to get an American researcher’s perspective on this stuff.

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