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

Preventing Crisis: Newfoundland and Labrador’s Electricity Shortage Examined

Earlier this month, Newfoundland and Labrador (NL) experienced what many called an “energy crisis,” when issues in a switchyard, combined with rising demand for power with to the onset of winter weather, led to a shortage of electricity. NL Hydro, the provincial crown corporation responsible for generating and supplying electricity throughout the province, staged rolling blackouts across NL to address the shortage.

Nevertheless, the province’s recent energy shortage raises two questions: first, how should government address short-term shortages? Second, how can it prevent shortages in the future?

When demand for power exceeds supply at full capacity, a number of outcomes are possible. First, rates could rise to a level at which individuals consume less energy, mitigating the shortage. However, the government, or an agency established by the government, typically sets rates to prevent monopolistic behaviour, ensure affordable power, and allow families to budget their energy usage without worrying about fluctuating supply and demand. Additionally, electricity tends to have inelastic demand, meaning that consumers do not reduce their usage significantly when rates rise (nor do they increase their usage when rates decrease). This is especially true when these consumers know that the rate increases are temporary. Indiscriminate rate hikes, therefore, would have to be particularly severe in order to adequately reduce consumption in a crisis.

The alternative–rolling blackouts–has its own flaws. When the market rate for electricity rises above the fixed rate during a crisis, shortages develop because of the lack of incentives for consumers to reduce their consumption. Power providers often use periodic blackouts in certain areas to deal with this shortage. Under such a response, those who value electricity dearly have no way to buy it from those who do not care about it all, since it is distributed by chance and not need.  Someone who wants to watch a movie, for instance, might receive power while someone writing an important paper might not, despite the fact that the former might value the electricity he uses much less than the latter.

Thus, there is little that NL could do about the disaster earlier this month. The real problem lies in the fact that such an incident is possible in the first place.

NL’s provincial government could address this possibility in a number of ways. First, it could open its grid to private generators. These businesses would see an opportunity to profit from the vulnerability of NL Hydro’s generating stations by offering their own power.

Alternatively, the provincial government could privatize Nalcor, NL Hydro’s parent company. Premier Clyde Wells first proposed privatizing the province’s energy utility over twenty years ago, which would have allowed it to operate more efficiently and respond to NL’s energy needs by freeing it from the political vices that pull it away from meeting its mandate. The Public Utilities Board (PUB) could continue to regulate the newly privatized Nalcor, though, ensuring that it does not use its monopoly status to boost rates. And as the recent Muskrat Falls debate revealed political discussions about energy policy tend to distract from the economic rationale for the Crown Corporation’s development decisions.

There are few reasons for not pursuing both reforms. In fact, they would decrease the likelihood of mishaps similar to this past month’s from recurring. They would also open up NL’s electricity market to new suppliers, thus, preventing the risk of shortage and allowing NL Hydro to make decisions based on the needs of the province’s residents, rather than the whims of St. John’s politicians.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute