Government Assistance and Unintended Consequences: Scotsburn Dairy

Nova Scotia’s Scotsburn Cooperative Services Ltd. announced recently that they are in the process of selling their fluid milk operations to Montreal’s Saputo Inc. for $61 million and purchasing Quebec’s family-owned Ailments Lebel Foods Inc., which produces ice cream and other dairy products.

Narrowing the company’s focus seems like a reasonable strategy for any business that discovers their competitive advantage and seeks to expand upon it. However, considering the amount of provincial funds used this past August to support Scotsburn’s operations in Truro, Nova Scotia, their decision to relocate in another province is troubling.

In March, Saputo and Scotsburn will finalize the $61 million deal, after which Saputo will resume dairy operations as a major distributor of fluid milk to Atlantic Canadian processors. In addition to Saputo’s acquisition of Scotsburn’s distribution network, it will also obtain ownership of some of its capital assets in Nova Scotia and Newfoundland and Labrador.

The details of Scotsburn’s agreement to purchase Quebec’s Ailments Lebel Foods, announced on 22 January, remain confidential, although they will likely finalize them in March. Scotsburn’s acquisition is part of a broader strategy to penetrate Canada’s ice cream market and the deal between Saputo and Scotsburn demonstrate its confidence that it can emerge as an innovator in the dessert industry.

Overall, these developments are business as usual. This includes concerns about employment stability and the subsequent loss to communities dependent on Scotsburn for their livelihood. More important is that Scotsburn received $7.5 million in provincial funds in August 2013 to help support the expansion of its Truro operations. Some of the money came in the form of a forgivable loan, although the province earmarked $2 million for purchasing updated processing equipment.

Consequently, the decision to relocate represents a significant departure, since the province assisted Scotsburn to bolster its operations in Atlantic Canada and secure its presence in the region.

Nova Scotian’s should be questioning the province’s decision to allocate provincial funds to Scotsburn. The province provided nearly $10 million in government assistance to secure Scotsburn’s Truro operations and provided additional employment opportunities and it is hardly conceivable that relocating to Quebec will produce those results. In fact, the company’s current business strategy clearly does not require provincial assistance–it is always good to be in a position to sell. The fact that it received such large sums of assistance already is the cause for concern.

Notwithstanding these developments, Scotsburn is seizing an opportunity to narrow its operations and become more profitable. However, this decision is at odds with Nova Scotia’s government, which provided assistance solely for securing Scotsburn’s presence in the province. Government assistance should help the local economy by generating more economic growth, increasing the standard of living, and producing employment opportunities. Scotsburn’s departure from Nova Scotia shows that government assistance is not always the strongest alternative for retaining industry and bolstering economic activity. Indeed, it is possible for some actors to take advantage of these programs and without proper specifications, the likelihood is much greater.

Rachel Lowe 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

The Energy-East Pipeline: An Opportunity to Turn a Province Around

New Brunswick has been making a rare appearance in the national editorial pages and the prospect of natural resource development through the Energy East Pipeline has been the principal topic of debate. Some observers argue that this could be the province’s opportunity to turn around its fortunes, but, as always, there is opposition citing environmental problems, among others.

That opposition generally stems from the argument that Canada must end its reliance on fossil fuels and fears of possible oil spills in the future.

While environmental concerns are particularly important in all natural resource development cases, it would be irresponsible for any government (of any political stripe) to ignore the possibility for serious economic gains. This fact becomes very clear from an examination of the state of the New Brunswick’s economy and the stimulus the project could provide.

It is no secret that New Brunswick has faced serious economic problems since the 2008 global economic meltdown. In September 2013, Statistics Canada reported that the province faced a 10.7% unemployment rate, which is one of the highest rates in the country. In conjunction with this report, CBC reported in the same month that the province lost approximately a net 2,944 individuals to other provinces in 2012.

Although these are only two indicators of economic performance, they tell a story that New Brunswick is facing a major economic problem.

This brings forward the next level of discussion: How can the Energy East Pipeline help build the New Brunswick economy?

TransCanada, the company who wishes to build the pipeline, employed Deloitte to explore the economic benefits of the pipeline for Canada. Deloitte found that the pipeline would add the following figures to New Brunswick’s economy:

  • $2,799 million to GDP
  • S266 million in tax revenues during construction (6 years)
  • $428 million in tax revenues during the operation phase (40 years)
  • 868 jobs in development (3 years)
  • 2866 jobs in construction (3 years)
  • 385 jobs per year in the operations phase (40 years)

These large amounts of tax revenues could mean balanced budgets for New Brunswick and extra money to spend in other areas of government, such as education and healthcare. Balanced budgets will also restore investor faith in New Brunswick.

The pipeline would create jobs that would not only reduce unemployment, but also increase consumption. That will lead to more economic spin-off, meaning that individuals will be able to afford more and, therefore, will buy more goods and services creating even more jobs in turn.

In conclusion, considering the state of the New Brunswick economy, it would be reckless for the government not to consider the opportunities that could be afforded to the province through natural resource development: the numbers show clearly that there is an extreme potential for growth and the Energy East Pipeline could have serious economic benefits for the province.

Randy Kaye 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