It's The Economy, Stupid

One thing is certain. The film and TV production industry may be small but it has amazing heft for its size.  The entire film and TV production industry in New Brunswick represents 0.048 percent of the GDP but I have gotten more calls, emails and blog comments on this in the past few hours than just about any other concept I have thrown out there.

At the risk of alienating one more segment of my readership, I will express my congratulations to the folks over at Radian6 for their sale to Salesforce.com.   My first exposure to Marcel Lebrun was during my short lived stint at NBTel.  Lebrun was Gerry Pond’s protege and that status combined with a good management team has led to the sale today – I have no idea what the ownership structure was but my suspicion is there are a number of new millionaires in the province tonight.

This is wealth creation folks.

The reason this seemingly positive event is likely to generate additional rotten tomatoes in my direction is that a number of my peers do not like foreign companies gobbling up our best and brightest firms – moving the decision making out of the province.  They bemoan the loss of decision making here and see this kind of thing as weakening the province.

While I readily admit that decision making does migrate out of the province, what we have witnessed is an unlocking of capital – much of which will be put to good use in New Brunswick.  How many IT firms in New Brunswick with interesting ideas have gone under and all that goodwill was destroyed?  I can name a dozen firms right off the top.  This is one, Radian6, that made it and we should be happy.

It now becomes the job of economic developers to make sure Salesforce.com continues to grow the NB operation.    Just like Oracle, or GTech or RIM – when they make a buy in New Brunswick it flows new capital down here and plugs us into the big, global tech firms.

We need to embrace this.  Hopefully, there will be firms that eventually do the acquiring and become the next McCain Foods from New Brunswick.  But in the meantime, I’ll celebrate this stuff.

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I’m not going to make many friends with my column today agreeing with the province’s decision to scrap the film labour tax credit.   To me this is another in a long line of industries where New Brunswick has made a less than half hearted attempt to compete.

Consistent with my emerging view on this stuff, if the film and TV production industry can come up with a plan to transform that industry into a growth engine (it has essentially been around the same size since I first started looking at it 15-20 years ago) and if there are tools the government can use that can be shown to provide value to the taxpayer, I say it is worth a look.

These days I think we need to be focused on growth opportunities rather than just coasting.  The challenge for all of these industries where New Brunswick has been playing at the margin for years is to have them come forth with a credible growth plan and look for ways for government to provide support.

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I was told not that long ago that ExxonMobil doesn’t put logos on its buildings because of the worry of security threats.    But it seems to me that ExxonMobil in New Brunswick is too far under the radar.

I just re-read the APEC report on foreign investment in which they profile ExxonMobil.  I want you to read the profile and then my comments below:

No mention of the 1,100 ExxonMobil employees in New Brunswick business services centres in Moncton and Saint John.   ExxonMobil employs far more people in New Brunswick than Nova Scotia and Newfoundland combined.  In fact, outside of Texas, I believe ExxonMobil has more employees in New Brunswick – as a percentage of the workforce – than anywhere in the world (maybe an exaggeration but four out out of every 1,000 New Brunswickers working in the private sector work for ExxonMobil – not including gas stations).

My assumption is that this is some kind of clerical error at APEC.  Maybe officially, the business service centres flow through Imperial Oil – the Canadian division of Exxon or something like that but make no mistake this is the most international of New Brunswick’s customer contact centres.  They handle customer activity up and down the Americas and beyond.

I respect the company’s  privacy but I think people should at least have a basic understanding of Moncton’s largest private sector employer.

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While I am not sure how much it is promoted, the Atlantic Time Zone provides a subtle advantage over other jurisdictions – particularly in an age of VoIP where the cost of telecommunications is not as distance sensitive.  From New Brunswick, a company can provide customer support in both the UK/Europe and the west coast of the United States in  a reasonable working day.    If a company keeps its customer contact centre open from 5 AM to 10 PM in New Brunswick, it covers the vast majority of the working day across North America and in much of Europe and the UK.    This is a subtle but interesting benefit from our location between the population centres of Europe and the United States.

There may be another interesting time zone-specific advantage.  There is growing interest in the idea of Internet searches being routed to the data centre that is paying the least for electricity.   At peak times during the day, the typical data centre will pay a lot more for electricity in Europe and North America.  The concept is to route Internet requests automatically to the data centre in the cheapest time zone and that would require a large firm like Google or Yahoo or Microsoft or Amazon to have their data centres dispersed in various time zones.    New Brunswick could be part of this mix.  When Europe is at peak electricity usage, New Brunswick is at its low end use.   There is a similar effect with the West Coast of the US.  You can see by the chart in the article that the cost of electricity in the U.S. can swing from 22 bucks to 80 bucks per MW depending on the time of day.

There is a guy over at ACOA thinking about this stuff a lot and he flips me articles once in a while.  It may be a little esoteric but every little niche needs to be explored.  If a few of the big data centre companies take up this time zone approach, they would be wise to have data centres in the Atlantic time zone.

There may be other ways where being centrally located from a time zone perspective has other advantages.

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You could argue any focus on economic development in the Maritime Provinces is one of the casualties of a minority federal parliament.     This argument would be based on the big moves to secure votes in Quebec and Ontario.   I guess the alternative view is that in a minority parliament small places like the Maritimes matter because every seat counts.   I lean towards the former view – it’s a complex game of triage.  Of course I readily admit my political acumen is limited.  I think I have predicted the loser would be the winner in six of the last eight federal or provincial elections.

The truth is that the economic-related issues facing the electorate here in 2011 are not that different than in 2008 or 2005 for that matter.  I think I mentioned before that a senior federal government official told me the demographic wave hitting Canada will hit here first and the rest of Canada will watch to see how we deal with it.  He was referring to the fact that New Brunswick’s population is aging even more quickly than the rest of Canada and our pool of younger workers is shrinking faster.

Most demographic problems have an economic soul.   The reason why NB is about to hit a wall is tied to decades of out-migration and a lack of immigration because there were not enough good jobs here.

This is a long winded way of saying the one time the average joe should think about the stuff I think about on a daily basis should be at election time.    They should be asking the politicians what is their plan for economic development in New Brunswick?

The NB government is looking at some big changes in how it does economic development.  Much of this has yet to be fleshed out but the language is there.   I would say the time would be ideal for the Feds to also do a forensic audit of its own efforts over the past decade to determine how much positive impact – or negative impact – they have had in the region.      At the most superficial level I find it odd that all levels of economic development in New Brunswick – local, provincial and federal – continue to talk about all the success when there hasn’t been a net new private sector job created in New Brunswick in almost four years.  In the private sector, this would be setting off alarm bells all over the place.

There doesn’t seem to be any similar mechanism in the public sector.  In fact,  I am told on a regular basis that “it would be far worse” without our efforts.  But if the vision for economic development in NB is to keep things from getting worse, I think we have a problem.

Two of my favorite books in college were Mancur Olson’s the Rise and Fall of Nations and Thomas Khun’s The Structure of Scientific Revolutions.  Both of these books are worth dusting off these days because they clearly show how we can get locked in a system – and can’t even see the need to break out of it.   There can be huge warning signs all around and yet we will defend what we know – the status quo – the paradigm – to the death.

In many ways the economic development profession is more sophisticated now than ever before.  I see examples of my colleagues in the consulting business using advanced stakeholder consultation techniques, a community level kind of psychometric testing, technical modelling such as shiftshare and location quotient, asset mapping – but when I read much of the output – charged at $100k and up – it looks to me like a lot of data and information but little insight.

Take something as simple as measurement.  We are building the most sophisticated techniques to measure the success of economic development and ignoring the only measure that really matters. Economic development over time – it doesn’t matter if you are a tax cutter or an interventionist – has to be fundamentally about growing the tax base that supports community and social objectives.    If we went back to that basic premise, we would probably change how we think about things.

I realize this is quite a ramble but there is a connective thread here.   There is a federal election.  It should be time to help politicians think about this stuff.  We should try to secure a commitment to do a broad-based review of federal economic development efforts down here.  Not in a heavy handed, accusatory way but to thoughtful assess the impact of the hundreds of millions of federal dollars spend in the Maritimes every year.

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In my column tomorrow I salute the government for getting the growth of health care costs down to 3% year over year in the 2011-2012 budget but I was thinking while doing the dishes tonight – isn’t there some kind of two year public sector wage freeze in place?  And we still have a 3% increase in health care spending and a 2% increase in overall spending?    Labour costs are usually around 60%-70% of public service costs -so with wage freeze on you might be able to argue that this budget – other than the cut in asphalt was not much tougher than the last budget.  Hmmm.  Can anyone confirm the two year wage freeze?

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I have been arguing we need a more coordinated sector-based approach to economic development.   Even as I argue this, new research is emerging that suggests a ‘cluster-based’ approach to economic development may not be as effective as fostering a more international approach – more international partnerships – not a regional approach – may be a better way particularly for smaller jurisdictions.  That is the argument put forward by my good friend Peter Lindfield in his column today.

I don’t have a problem with this thinking in theory but I still maintain that competitive advantage is an industry thing – not an economy wide thing.   There may be some attributes of competitive advantage that are common to all industries (say a low Canadian dollar or a low cost operating environment) but when you look at the things that make an industry competitive- its management talent, its workforce, its innovative capacity, its access to infrastructure, its ability to develop markets, build international partnership, access VC, etc. that tends to be quite industry specific.

So when people talk about policies that create competitiveness – and at the same time eschew sector focus, I don’t understand the thinking.  Bernard Lord cut small business taxes to the bone – a classic example the thinking that you create ‘general conditions’ and the investment will flow in.  It didn’t.  Shawn Graham cut personal and corporate income taxes and the investment was supposed to pour in.  It didn’t.    Lord had some vague ‘innovation’ agenda – not even as vague as Graham’s – and where did it get us?

If you don’t like the word ‘cluster’ then scrap it.    If you want your firms to look outside your borders to connect into some kind of ‘international’ cluster and build partnerships with companies and institutions abroad, fine.  But the idea of sector focus is not incompatible with that.

What I am saying is that the leaders of our key growth sectors and the various government and educational institutions that impact their potential growth should get together and map the conditions under which that sector could be successful and achieve significant growth for the New Brunswick economy.  I am saying that has been done very weakly in the past usually with no accountability or even rudimentary measurement of what is success or failure.

I firmly believe the old model is failing or has failed.  I am told weekly by economic developers at all levels that with some exceptions such as shale gas ‘we have nothing to sell’.  They will tell me the high value of the Canadian dollar, the increasing pressure on costs and a tightening labour pool is eroding any advantage they had in the past.  This is forcing many of them to invest outside NB and others to drive a productivity agenda to get more efficient.   Others are holding on hoping for 75 cent Canadian dollars again but I don’t think that day is coming.

I say we need to answer that question ‘we have nothing to sell’ and answer it head on.  If we think there is potential to grow the ICT sector, then let’s have a clear plan with a well defined path to get us there.  If we need a special tax break for that sector, bring it on.  If we need to pump up a certain type of graduates, bring it on.  If we need to set up research chairs at the university in specific ICT disciplines bring it on.  If we need to set up an ICT partnership with Bangalore, bring it on.  If we need to have ‘sales staff’ in Israel trying to bring investment and partnerships, bring it on.  If we need to have a government as model user, bring it on.

But do this as part of a plan that at least most of the key stakeholders can agree with.  Because very little of what I describe in that paragraph can be done by one organization.

If you don’t like my approach, by all means, bring on alternatives.  I’m all ears.    But back it up with evidence.   Just cutting taxes and crossing our fingers won’t work – it’s been tried.

By the way, for those of you who think I am some kind of big government guy picking winners and losers, remember the core of my approach has the private sector leading and the government and education institutions supporting industry growth strategies.    Let’s just to be clear about that.    In my Pollyanna-ish world there would be a private sector funded industry group – maybe even on a regional basis – with funding from government and other stakeholders that would develop a growth plan for their sector and government and education would plug in where there is a fit but industry itself would lead.

My economic development colleagues are rolling their eyes but I still think in the longer term that is the best model.

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The provincial budget today and the federal budget tomorrow.  Coincidence or tactic?  Before the discussion begins on the provincial budget we will be debating the federal one (I am on a Maritime-Noon panel tomorrow).

I have been chatting with folks who think about this stuff all day long and they tell me that Premier Alward is in a good position.    He will likely raise some taxes but not HST or income tax, announce some cuts and budget freezes and layout a 4-5 year plan to get back to balanced budgets.   He will be criticized for not going far enough with the cuts and those who were cut will feel somewhat relieved (“it could have been worse”). It was suggested to me that even an HST rise in the next budget could be framed in this one.  If ‘experts’ criticize him for not raising the HST, that may give him cover to use this tool next budget.  It is interesting that everyone from union leaders to the great Jack Mintz himself (architect of Graham’s tax cut strategy) have said the province should raise the HST (with protections for lower income NBers) but the Premier has steadfastly said no.

As for the Fed budget, I don’t expect the kind of draconianism we saw in the mid1990s where places like Moncton and Halifax really were hurt but federal cuts to payroll and northern NB was hurt by changes to EI and other transfer cuts.  Because there is an election coming, I suspect there will be sober talk of the need for fiscal discipline and then a roadmap for cutting spending over a 4-5 year period.    I do not expect the feds to raise any taxes of significances.  As for NB,  you can assume squeezing and tweaking (cutting ACOA by some but not huge for example) and you can assume employment freezes.  A relatively unreported story has been the rise of federal employment in New Brunswick over the past decade.   This has added tens of millions of dollars in high value salaries to New Brunswick.  You can expect this growth to stop but likely not retard too much.

Again, the government will be retrenching and if the private sector doesn’t start investing and creating jobs, we are in for a long flat – possibly negative – run.

Federal Government Employment in New Brunswick

Source:  Statistics Canada. Table 183-0002 – Public sector employment, wages and salaries, seasonally unadjusted and adjusted, monthly (table).

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I think I mentioned in the past that I listen to the audio edition of the Economist magazine each week on my Ipod.  It’s about a six hour or so endeavor but between snow shovelling, driving, cleaning house, etc. there is usually time each week.

Much to my surprise this morning while making the kids’ lunches, I hear the article reader start to talk about innovation in the public service and wasn’t I surprised to hear little New Brunswick mentioned as an example of government innovation “spurred on by a new generation of younger, more web-savvy civil servants”:

Many think the web will shift the balance of power between the public sector and its clients. Worried about your child’s school? You can join a discussion group on Facebook. Furious with the American government? You can see how much it is costing you at mygovcost.org. Fed up with Britain’s lousy roads? Go to fixmystreet.org. Don Tapscott, one of the cleverer cybergurus and co-author of “Macrowikinomics”, points to the rise of “prosumers”: rather than merely accepting what the government offers, citizens will shape new services as they appear. Places like the District of Columbia and Canada’s province of New Brunswick have been pioneers, spurred on by a new generation of younger, more web-savvy civil servants.

I assume the article is referring to Service New Brunswick but if there is a more obvious example of a web-savvy government transformation here let me know.

It got me thinking about the factors that went into Service NB.    One, a public demand for more efficient public services (but this existed elsewhere too).  Two a Premier that was a driver of this stuff (remember the failed Accenture deal around technology and health care?).  Three, there was a cost crisis.  The Service NB model was developed during the massive retrenchment in public spending in the early to mid 1990s and, four, there was a core team headed by a guy named Bob Gamble (I think) who took on the project with gusto.

Fast forward to 2011.  I would argue there are some of the same factors relating to our economic development efforts.  Sure, the public demand isn’t really there but the Premier is making the right noise about economic development – I hope he is a driver on this.  There is a cost crisis and there is a move afoot to do some new – and maybe innovative – thinking around economic development efforts.

I won’t get too far into this thinking but one example has been on my mind recently.

Just to set the context, I keep hearing from everyone that the ‘game has changed’ when it comes to attracting new business investment to the province.  I am told that competition is far higher (mostly as a result of the U.S. crisis) and the traditional value proposition for the province – lower costs and lots of available workers – is drying up.  It’s the new buzz phrase – value proposition or business case for investing here (this applies to local firms as well who are building offices elsewhere to access labour).

At the same time, the same experts will say that nowadays the value proposition for investment is tied to specific sectors.  A broader, low cost/available workers value proposition only makes sense in relatively low skilled industrial activity and there is lesser of that around these days.

So my logical question is simple.  What is the concentration of people – public and private sector – in New Brunswick working to build a new, compelling value proposition for investing in our potential growth sectors?

We have by most estimates around 600 government people working in economic development in New Brunswick between BNB, RDC, ACOA, Enterprises, CBDCs, NRC, NBIF, etc.   So how many of them are focused on building the value proposition for a specific sector – say ICT, aerospace, life sciences, forestry, minerals, etc.?

It seems to me this is a core problem and just ready to be plucked for a new approach.  BNB might have a few people assigned to a specific sector – mostly likely in different divisions and functions.  There may be a few people in the Enterprise agencies working part of the time on a specific sector, ACOA maybe a couple.

Then there is the private sector efforts to grow their own industry.  Most industries have virtually no capacity building organization in NB – some have a superficial organization with an executive director tasked to lobby the government.

Think about how you might really lean into a sector and pull a ‘Service New Brunswick’.

What if there were 50 people working directly on growing the ICT sector from the public and private sectors?  All working on a coordinated plan to address the talent pool, foster the R&D environment, support the attraction of industry leaders, work collectively on infrastructure, etc.  What if the public and private sectors jointly invested in a plan for a serious ‘Service New Brunswick’ style effort to grow their sector?

50 people out of 600 (and that is just on the public side) doesn’t seem like a lot but it is laughable given the current bureaucracy, silos, mistrust between public and private players, education on the periphery, etc.  It is hard to get people within a department sometimes – let alone between departments or governments or government and the private sector to work closely on a a specific initiative.

I think this is an important and timely thought exercise.

In my view we could really take our economic development efforts to a new level if we thought in this way.  It’s not about soviet style planning.  It’s about getting a critical mass of talent, resources and ideas working on a joint solution to a serious problem.

Sure government and industry will always have points of tension.  Industries will always have intra-industry competition. The culture of the education community will never fully mesh with a private sector culture but that should not stop us from trying.

The last point is around how to select sectors with growth potential.  You can’t marshal 50 people for 500 sectors.

A few comments on this.

First, I don’t think you have to be so draconian about this.  We start with the low hanging fruit.  We take a long look at internal strengths and map that to investment trends in the wider world.  We align resources.  If a new, emerging industry group comes along – say a sub-industry like social media – and is convinced in the potential to create hundreds of new jobs and millions in new tax revenue for government, we can expand the group of sectors.  Remember, in my model we are leveraging private sector resources as well – not just taxpayer dollars.  If an industry is prepared to put – even a modest amount of – money on the table, that good will is worth leveraging.

But the focus has to be on growth.  There are key, legacy industries that we need to nurture to ensure their ongoing success even if there is not much growth potential but we must focus on those sectors with real growth opportunities.

If you go back 10 and even 15 years we were told that ‘aerospace’ held amazing potential for NB.  It’s not much larger now than it was back then.  There are many examples of this.    If we really lean into a sector development effort and bring a wide range of people, resources and ideas to the table we have to be reasonably assured there is potential for growth.  Spending millions to stand still or even go backward is not my idea of a ‘Service New Brunswick’ level of success.

Who knows?  Maybe in 10 years they will be talking in the Economist magazine about a new savvy group of economic developers in New Brunswick.

We won’t know if if we don’t try.

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My column today looks at the tepid employment performance of the NB economy.   While the media coverage has been sparse – New Brunswick’s three years of no new job creation should start to worry someone.   According to Statistics Canada, in 2007 there were 357,100 employed persons.  By 2010, there were 356,100.    It’s one thing to underperform the national average.  It’s quite another to be dead last.   As I point out in the column, if there was a foreseeable jobs boom on the horizon this might be considered a blip but I can’t see one.

The implications of this are also hard to know for sure but are not likely to be good.

Five Ps to help to change this:

1. Performance: Get Invest NB rolling with a fresh mandate and a highly dynamic and engaged team of sales guys/gals.  While many are skeptical, I think this organization should be able to stimulate considerable new investment by getting focused and building a high calibre team.  The feedback loop into building a stronger value proposition for investing will also be strengthened.

2. Partnerships: Build strong industry association/cluster groups around key growth sectors.  I hesitate to even use the word association because I am not talking directories and golf tournaments.  I am talking about key stakeholders in growth sectors taking a more direct lead on the direction of the sector rather than leaving it to government.   That is even strange to say but it is true.    In my ideal world, businesses, government, R&D organizations and education stakeholders would be in a room charting a path for the sectors with high growth potential and then building a joint plan to make it happen.

3. Positive role for Government: Have a far more clear and value added role for government.  We have talked here about my theory that economic development in New Brunswick has become a euphemism for providing financial support to SMEs so no need to go further on that.  Just to say that government should have a more holistic understanding of how it (as over 1/3 of the economy) can positively and negatively impact economic development.

4. People: We have got to figure this out.

5 Productivity:  New Brunswick’s economy, its SMEs and its big companies need to be far more focused on innovation and productivity.  A lot of people hold their noses when the Feds gave AV $19 million this week for a major innovation at their NB facilities that will drive down their cost of production and make them more competitive.  Without getting too far into this discussion, it seems this is a far better investment compared to a loan guarantee or grant to keep a company afloat until the next election.  Innovation is about shifting the cost curve downward – and this helps AV do that.

% Change in Total Employment (2007-2010)

Source: Statistics Canada. Table 282-0002 – Labour force survey estimates (LFS), by sex and detailed age group, annual.

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