Derailing Economic Growth on Cape Breton Island

In a quote that could be easily mistaken for a passage from Ayn Rand’s Atlas Shrugged, Cape Breton Regional Municipality (CBRM) Mayor Cecil Clarke said of the St. Peter’s-Sydney line closure, that “The wider economics of Nova Scotia and Cape Breton Island are larger than those of the shareholding interests right now of Genesee & Wyoming.” Politicizing economic development, as has been done in Cape Breton, is a slippery slope and the millions in financial support from federal, provincial, and municipal governments to keep the Sydney Steel Plant afloat is evidence.

Genesee & Wyoming, a short-line railroad holding company based in Connecticut, decided to close the St. Peter’s-Sydney portion of the Truro-Sydney rail line, which moves more than 22,000 cars annually, transporting paper, coal, lumber, petroleum products, and chemicals. Since 2003, business has declined threefold, despite that company receiving a $20.6 million subsidy to provide services to customers on the Island. The latest rate hike increased prices by more than 300 per cent and left the company with only three customers. Michel Huart, Genesee & Wyoming’s legal counsel, has told the Nova Scotia Utility and Review Board that prices were likely to increase again in 2015 if the company operates that line.

CBRM, the Cape Breton Student’s Union, Sydney and Area Chamber of Commerce, and Cape Breton Partnership are lobbying for the railway to continue operations, arguing that it is crucial to existing customers and necessary to develop the Sydney port.

In a market economy, businesses respond to incentives and invest where there is an opportunity for growth. The companies responsible for operating the St. Peter’s-Sydney section of the rail line, however, have received $20.3 million for offering their services to local companies. Yet, despite this subsidy, Genesee & Wyoming would rather shut down the line east of St. Peter’s junction. If a company literally refused to take free money to continue operating that line, the benefits of doing so must be very small, if there are any.  Elected officials in Cape Breton, in addition to the business community there, would like the line to remain ere it is because it provides jobs, easy access to raw materials, and the three remaining customers would have logistical challenges receiving cargo via transport truck. They also argue that it is vital to the development of Cape Breton, particularly because of the Sydney port.

CBRM received government funding to dredge the harbour in 2012 and ostensibly, all that is left is building a container terminal in the Sydney port. The federal and provincial governments, in addition to private investors, have not been eager about the project, however, and the lack of potential customers has some people very concerned about the future of it. According to city councillors and business owners, the problem is that Genesee & Wyoming are shutting down a rail line that operates roughly one train per day and is in need of upwards of hundreds of millions to meet the capacity of larger container ships: without this line, the port will never be developed and Cape Breton will miss out on a great opportunity–or so they say.

This situation is the same we face every few years, but with different actors. Fundamentally, the community has the cause and effect backwards: economic growth comes before economic development, not the other way around. Time, and time again, we call for the government to dredge our harbour, save our railway, build a container terminal, subsidize the steel plant, and the list goes on.

It is nearly impossible to place economic development before growth, particularly because of the risk involved with investing in a community without medium or long-term prospects for growth. There is a reason why the only “big jobs” in Cape Breton are government jobs: private companies do not want to invest in a hostile climate suffocated by government regulation. Imagine the reaction of high-level managers from companies around the world when a company decides to stop operating a rail line that has three customers, even though they received $20.3 million in subsidies.

Nova Scotia, and more broadly, Atlantic Canada, must begin promoting growth before development. Approving the Donkin mine project, fracking operations, and other natural resource extraction is a step in that direction and creating a policy framework that encourages manufacturers to build plants on Cape Breton Island is another. In fact, the CBRM could have approved the operations of an iron pellet plant, creating roughly 500 jobs, but opted, instead, to create Open Hearth Park.

The closure of the St. Peter’s Junction is not about developing the port or the loss of easy transportation, it is a symbol of Cape Breton’s mentality: build it, have the government fund it, and the economic benefits will follow. It is time that our politicians and business owners rethink their relationship with economic development as something that is earned, not bought. Smart decisions will almost always ensure economic development–it is when smart decisions are not working when, perhaps, the government should take a larger role in economic development. But it must stop considering economic development as the end goal: while it is unequivocally beneficial, having a railroad for the sake of having a railroad, particularly because “Halifax has a railroad,” is not conducive to building a productive economy. CBRM’s end goal should be to increase material wealth and wellbeing.

Until the CBRM can better understand the cause and effect relationship between economic growth and economic development, it will remain trapped in a vicious cycle of economic decline.

Corey Schruder is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in history at Cape Breton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Three Case Studies of the Municipal Fiscal Crisis

In The Economics of Amalgamation, I discussed some of the structural forces bearing down on Nova Scotia’s cash-strapped municipalities. Rising costs are combining with revenue gaps from commercial closures and out-migrations, and giving pause to our small towns as they contemplate dissolution. But, this vulnerability isn’t limited to rural towns. Districts and regional municipalities are feeling the pressure, too. While my last post provided some high level statistics, this post highlights three case studies in municipal vulnerability at each of scale.

The Town of Hantsport | Population est. (2011): 1,159

When the Hantsport Town Council voted 6-1 to dissolve in April it came as a shock to many. While the dissolution of Canso, Springhill and Bridgetown were on people’s mind, Hantsport’s straits didn’t seem nearly as dire in comparison. Nonetheless, the Mayor at the time argued that the decision was forward looking and inevitable given the closures of Minas Basin Pulp and Power and the Fundy Gypsum mine. With the preliminary steps to dissolve underway, Hantsport’s financials have been analyzed by Grant Thornton and submitted to the Nova Scotia Utility and Review Board. The data give a solid footing to the Mayor’s dreary stance. As of March 2014, the Town is holding net financial liabilities in the amount of $2 million. The loss of commercial tax base has caused annual tax revenue to decrease 7 per cent in fiscal 2013 and a further 12 per cent in fiscal 2014.

Revenue's collapse as presented the Town Council's decision to dissolve.

Revenue’s collapse, as presented, following the Town Council’s decision to dissolve

Given the collapse in commercial revenue, mandatory expenditures on infrastructure would need to be debt financed over a 20-year term. Grant Thornton forecasts that the fraction of Hantsport’s own source revenue needed to service debt would climb from 12.3 to 28.5 per cent between 2016 and 2020, far exceeding the 15 per cent maximum prescribed by the province. By 2020 this will translate into a projected $1.4 million culmulative deficit. Paying for this would require residential and area property tax rates to double, generously ignoring any subsequent decrease in tax collection ability.

If this situation looks bad, keep in mind that Hantsport has actually been exceedingly prudent in its fiscal management. Over the years, the town has run modest surpluses and even set some savings aside. Yet, the small size of the town and its dependence on a couple commercial properties left it vulnerable. These challenges haven’t stopped the locals from questioning Council’s decision to dissolve. Since that fateful vote, a new mayor and several councilors pushed a motion to have the application withdrawn. The vote took place December 2nd and failed. Hats off to Hantsport for seeing the writing on the wall.

The District of Chester Population est. (2011): 10,599

In Fall 2013, Nova Scotia published its “Fiscal Review” and highlighted the particularly striking case of Chester’s creeping costs. According to the review, a pre-budget analysis for the District of Chester determined 2013/14 could expect $243,481 in revenue increases. Not bad! …except that Chester’s mandatory payments would be increasing $235,623, as well. In the words of the review:

This leaves less than $7,000 to cover any in-house cost increases, and to consider any new, expanded services. With a total budget of $22.4 million, the net increase in disposable revenue from assessment growth is less than 0.1% of the budget…

In Nova Scotia, municipalities collect taxes on behalf of the province in the form of mandatory contributions to pay for things like provincial roads and corrections facilities. Mandatory contributions represent one-fifth of municipal expenditures, the vast majority for education followed by policing. Controlling these costs is largely out of the hands of local municipal officials. While municipalities can share their perspective through an advisory committee, councils have essentially zero influence over, say, RCMP negotiations.

Cape Breton Regional Municipality |
Population est. (2011): 97,398

From the same Fiscal Review, Cape Breton is offered as an example in how regulation drives up municipal costs. The review reports that the regulatory costs to Nova Scotia of meeting new Wastewater Effluent Treatment Standards require $1 billion in upgrades by 2040. Nearly half of this cost is in CBRM, which needs “$425 million in capital investments by 2020 [and] an additional $29 million by 2040.” Expensive, yes, but it would also be nice for raw sewage to stop flowing directly into the Sydney harbour!

While the Federal government has pointed to gas tax revenues as a possible source of funds, the Mayor is reaching out for provincial cost sharing. Without support, the CRBM interim chief administrator Marie Walsh warned the upgrades would restrict them from doing any other capital projects and would dramatically increase their debt.

Whether its a town, district or region, Nova Scotia’s municipalities are being pinched at every scale. Yet, while towns like Hantsport sort through dissolution, regional municipalities like CBRM don’t have that option. In every one of these case studies, however, the cause of fiscal crisis was not actually failing infrastructure, mandatory payment increases or regulatory compliance costs. Rather, these are the sort of forces that have been ever-present for our municipalities. It just takes economic stagnation and out-migration (of people and industry) to bring them to the fore.

Samuel Hammond is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Carleton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Envisioning a Better Rural Transportation System

Consider this hypothetical scenario: a very successful company has grown to the point where its consumer base is roughly 100,000, but due to mismanagement, evolving technology, and changes in consumer preferences, that company’s consumer base drops almost 75 per cent to 25,000. As a stakeholder, should you continue to invest in the company to appease a small cohort of loyal consumers, cut your losses, or revamp the business model? Depending on the situation, the latter two options seem to be the most feasible.

In this instance, we are talking Transit Cape Breton.

During its peak, Transit Cape Breton had a ridership of 1.25 million, which has dropped to 320,000 in 2013. Annually, it receives $3 million from the CBRM, however, planned cuts will push that number down to $2.3 million. Predictably, there has been an outcry from the community, mostly from seniors, the unemployed, and the disabled. The largest criticism has come from proposed route reductions and the implementation of a single fare.

Government-funded mass transit is a classic example of the information problem, and to a certain extent the public goods problem. In this case, government is unable to assess accurately the need for transit. Moreover, deciding how, where, and when to provide a service is a political process that results in low-quality, inefficient outcomes. These inefficiencies, however, do not indicate that Cape Breton should not have a transit system–public or otherwise; it indicates the need to revisit the business model and adapt it to the omnipresent “rural disease”–an outflow of young skilled workers, an increase in the amount of seniors, and a deficit of economic development.

There are several ways, however, that the CBRM could develop a profitable transit service.

The addition of smart card passes should be a priority. Reloading them is effortless and they would benefit seniors. Moreover, Transit Cape Breton should engage with the Cape Breton University Student Union and begin negotiating a student transit plan. In Kingston, Ontario, the Alma Mater Society (AMS) at Queen’s University charges students a mandatory $46.50 for an 8-month bus pass. Transit Kingston’s largest source of revenue is the deal they have with the AMS. According to the 2011 Transit System Review Report, a majority of ridership attends the university. The report recommends rearranging routes, zoning, and transit fares to reflect this fact.

Secondly, the municipal government has taken a respectable stance on cutting routes that have low ridership–obviously the government cannot commit limited resources to an area with very low ridership at the expense of high volume zones. However, there are ways in which the government can replicate that service through promoting private enterprise or creative resource allocation. In Richmond County, Nova Scotia, the transit system, albeit a very small one, is a non-profit community based transit line. Facilitating the creation of something similar in communities such as North Sydney, Sydney Mines, Glace Bay, and some areas of Sydney would be beneficial. Additionally, the CBRM could use school busses when they are not in use to serve low volume routes.

Lastly, the CBRM should consider partly- or fully-privatizing transit on Cape Breton Island. The United Kingdom privatized transit in 1985, which resulted in lower costs through increased productivity and employment cuts. York Transit, GO Transit, and Phoenix Arizona have contracted out certain portions of their transit, saving $2 million annually. In Cape Breton, contracting small busses to service low volume routes or amending by-laws to allow independent operators to run certain routes should be an option.

These are only some policy options the CBRM can pursue and most of them have a proven track-record of cost reduction and service improvement. What we can say for sure though is that Transit Cape Breton is in need of a massive overhaul.

Corey Schruder is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in history at Cape Breton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies