A Historical Overview of Venture Capital in Nova Scotia

For much of the 20th century, angel investment and venture capital (VC) played a minor role in Nova Scotia’s economy. Today, however, Atlantic Canada’s start-up and VC community is booming, particularly in Halifax. To understand why these investment tools are succeeding in the region, it is instructive to review the history of VC in the province from the perspective of supply factors and demand factors.

Access to capital and credit in Nova Scotia has been constrained historically. Economist Dane Rowlands, for example, argues that “The view that the venture capital market is weak in Atlantic Canada is supported by the findings of Association of Canadian Venture Capital Companies. Of the 341 venture capital investments undertaken by the 56 active venture capital funds in Canada in 1993, only two were in Atlantic Canada.” One common view was that Nova Scotia suffered a geographical disadvantage via its removal from centers of finance in Canada and the United States. As political scientists Rodney Haddow put it, “There has long been an article of faith in Atlantic Canada, supported by some research, that banks are reluctant to lend in the region, and that the region consequently suffers from a chronic lack of credit.” Rowland’s conclusion in 1996, though, was that the main constraint on VC was lack of demand: “Demand for venture capital supplied on a commercial basis is relatively low in Atlantic Canada. Little evidence suggests that a shortage of venture capital actually exists in the region.”

This lack of demand is the result of many different factors. First and foremost, the Nova Scotia economy traditionally comprised primary sectors such as mining, forestry, fishing, and steel and banks typically dominate early stage financing in these industries (or through the use of convertible bonds). In contrast, VC investment is usually an individual investor or fund manager taking an equity stake with uncertain returns. Demand for robust angel markets, therefore, did not truly arrive until Nova Scotia’s economy began diversifying in the 1990s.

Emerging sectors such as Information and Communications Technology (ICT) coincided with a new awareness of angel investment among politicians and economic development officials. A 1991 policy-direction paper authored by then-leader of the Nova Scotia Liberal Party Vincent MacLean was particularly prescient and it gives a vivid glimpse of how focus was shifting toward ways of developing VC markets:

“Governments must and, as we will see, can help provide the capital required for start-up and for expansion, but not public money, and not free money. Rather, what is required is access to a pool of capital willing to make equity investments in the economic development of this region…The availability of capital is a major constraint on business and industrial start-up and expansion in Atlantic Canada. Therefore all avenues of providing patient, long-term capital to sound enterprises in the region need exploration.”

The paper may be the first recorded interest of a provincial party leader in developing angel markets, insofar as “patient capital” has long been synonymous with angel investment. However, MacLean’s quotation, and it’s allusion to “free money,” must be read in the context of the province’s development policies: the fiscal constraints of early 1990s featured a growing consensus against expensive industrial policies that experts saw as low-impact and high-cost. Furthermore, the public often displayed skepticism about favouritism, patronage, and corporatism.

As detailed in The Savage Years, the reform era of the 1990s included an effort to redesign Nova Scotia’s economic development policy to depoliticize and cost-minimize various programs. Among MacLean’s proposals were the creation of a Nova Scotia investment vehicle eligible for retirement accounts and “a more all-encompassing plan, where all local investment results in tax credits, and where a wider, more diversified range of companies are eligible.” This plan would encourage community investment while controlling costs and decentralizing decision making.

The latter proposal came to fruition shortly thereafter, in 1993, when the Nova Scotia provincial government enacted the Equity Tax Credit Act, the stated intent of which was “creating an important pool of venture capital for the province” by encouraging investment in small- and medium-sized businesses. The Act created a 30 per cent “equity tax credit” (ETC) for investments in businesses with fewer than $25 million in assets and revenues, a head office in the province, and at least 25 per cent of wages paid in-province. Nova Scotia’s government raised this rate to 35 per cent in 2010 and the maximum annual tax credit to $17,500, or 35 per cent of a $50,000 investment, with a five year holding period. ETCs immediately proved popular and uptake accelerated into the late 1990s.

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Interest in developing Nova Scotia’s venture capital market continued through the mid 1990s and, in 1994, the Atlantic Provinces Economic Council (APEC) submitted a report to the Working Committee on Venture Capital titled Equity Investment in Atlantic Canada: A Key to Entrepreneurial Expansion. Among its recommendations was the creation of a privately-managed $30 million Atlantic Investment Fund (AIF) for the four Atlantic provinces. This proposal would sit relatively idle for nearly two decades until the 2013 announcement of Build Ventures, currently capitalized at $48.5 million. 1994-5 also saw pass the Innovation Corporation Act, establishing Innovacorp as a crown corporation involved in early stage VC (and absorbing the Nova Scotia Research Foundation).

The 2001 tax credit review by the provincial Department of Finance echoes the buzz around VC from the time: Nova Scotia is gaining a national profile in the venture capital community. This is largely attributable to the favorable economic performance of the Halifax area in recent years.

All this history is just to show that the resurgence of the VC community in the last few years is not without precedent. In a future post, I will turn to the contemporary landscape, and assess the viability of Nova Scotia’s start-up landscape going forward.

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

Nova Scotia’s Tourism Ferry Tales

Nova Scotia has historically relied on sound marine infrastructure to move goods, services, and people around the province, the country, and other countries. Travel and transportation from Nova Scotia to the United States and other jurisdictions in Atlantic Canada is quicker by sea than by land and investing in such infrastructure is useful, but sometimes politically motivated.

Such is the situation surrounding the Nova Star Cruises in Yarmouth, Nova Scotia

First and foremost, the provincial government has invested millions of taxpayer dollars into the ferry despite several problems plaguing it since the 1970s. Moreover, negotiations surrounding it have not been transparent and elected officials who support the ferry, which connects Yarmouth to Portland, Maine, more than likely do so for political, rather than economic, reasons.

Initially, the Nova Scotia government approved a seven-year $21 million subsidy to the ferry operator, Nova Star Cruises, which that company spent wholly in its maiden season. Following the initial subsidy, the provincial government forwarded to Nova Star Cruises an additional $5 million to cover expenses, and shortly after, it sent another $2.5 million for staffing fees and transportation costs.

It remains unclear why, or how, Nova Star Cruises spent $21 million that was meant to last for seven years and it is possible that the provincial government has given the ferry operator additional funds that have not been disclosed publicly. Economic and Rural Development Minister Michel Samson, for example, initially and unequivocally stated that the provincial government had only paid out a total of $26 million, but later, following a government report on the ferry expenses, it forked out an additional $2.5 million, raising the total to $28.5 million. This discrepancy may appear minor, however, the fact that Nova Scotia’s government is mum about these expenses is concerning.

Aside from issues of transparency and government accountability, investing in the ferry service seems to have been misguided. The Nova Scotia Tourism Agency, for instance, attempted to quantify how impactful the ferry has been on the Nova Scotia economy and found that it may have contributed to an $11 million increase in hotel revenue. In other words, for every dollar the government spends to use the ferry as a means of attracting tourists to the province, they get less than half of a dollar in return, which even Keynesians would agree is a terrible multiplier.

The provincial government will announce its plans for the 2015 Nova Star Cruise ferry service within a few days, and although I suspect the announcement will include additional subsidies for the ferry operator and a “feel good” plan to attract more tourists, the provincial government should rethink its tourist strategy in southwest Nova Scotia. Tourism numbers have been increasing steadily in Nova Scotia recently and it is doubtful that the ferry service is having a large enough effect on the local economy to warrant such large cash injections. Moreover, the operator employs only 20 individuals from the province.

Instead, the government should focus on increasing the presence of short-distance ferries for transportation. One major problem facing local fisherman and processors is not having the ability to transport their fish to markets outside of Nova Scotia at a low-cost and before their product expires. Reefer trailers, which fishermen use to transport their product from the point of processing to consumers in other jurisdictions in Canada and the United States, are costly and time-consuming; increasing ferry capacity for trucks and trailers transiting to Portland and New Brunswick would better service the community than focusing solely on tourism.

Provincial governments in Nova Scotia focus on promoting tourism because residents in that province have bought into the idea that it is a tourist destination constrained by a lack of accommodating and appealing services, i.e. if the provincial government simply invests in tourism infrastructure, Nova Scotia will shine as a tourist destination. This perception of the issue compels elected officials to lobby for projects that do not necessarily provide real benefits to Nova Scotians. A fair compromise would be to follow the Marine Atlantic approach in Newfoundland and Labrador, which is to ferry passengers and transport goods and services.

In the end, this issue is another example of how government can mismanage an issue that has a clear and simple solution.

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

A Win for Healthcare Reform in Nova Scotia

Economist Paul Krugman once wrote that “the basic picture one should have of the government is of a huge insurance company with an army.” Increasingly, what defines the government is more or less summed up as “public health-care provider,” which, while it may exclude the military, comes with its own well-regulated militia in the form of powerful nursing unions.

In an aging Nova Scotia, the militant tactics of nursing unions have ranged from illegal strikes to coordinated mass resignations. Indeed, Nova Scotia recently had to enact essential service legislation that pertains to the healthcare industry, making it the final province to do so, after three major labour disruptions in only seven months. With fifty bargaining units and nine District Health Authorities (DHAs), the politics of healthcare reform is an abyss for premier after premier to throw scarce political capital into, never to be seen again. Yet, it is hardly surprising that successive governments keep returning to healthcare when it accounts for more than half of the provincial budget and 13.2 per cent of Nova Scotia’s GDP–the highest rate among the provinces.

The latest attempt to simplify the system involves the majority government’s initiative to collapse the DHAs down to 2 and the 50 bargaining units down to 4 major worker categories. This development will, in turn, require Nova Scotia’s four unions representing the healthcare sector to each assume a worker category based on their own membership rates. For instance, while registered nurses (RN) are currently spread across all four unions, they will likely end up pooling in the Nova Scotia Nurses Union (NSNU) since they have the highest number of existing RNs for members.

These developments have clearly put the largest union in the province, the Nova Scotia General Employees Union (NSGEU), in panic mode. Under the new system, it may end up solely representing clerical workers and, as a result, take a big hit in its higher-wage membership. According to Metro writer Stephen Kimber, it’s a “divide and conquer” strategy that will “decimate” the NSGEU’s revenues. In a last ditch effort earlier in the year, the NSGEU implored the other unions to set rivalries aside and form a Bargaining Association (BA). This shift would have represented a major swing in political power towards the unions. Instead, the NSNU was wise enough to realize they had everything to gain by going with the government’s plan.

The new balance of power will hopefully provide a window for significant wage restraint among Nova Scotia’s healthcare workers. When the Health Association of Nova Scotia compared Nova Scotia with British Columbia in 2012, they found that Nova Scotia spends “substantially more in most categories with the exception of public health and capital.”  The report was quick to point out that “demographics, on their own, account for a relatively small proportion of growth in health spending … The main cost drivers in health-care are increased utilization of services (e.g. drugs, specialists), innovations in medical science and technology, and salaries paid to health-care providers,” which, in turn is mostly accounted for in differences in organizational structure and funding models.

There is, therefore, good reason to think that reforming bargaining units may help begin to rein-in both wage growth and strike frequency, a state of affairs sometimes referred to as “labour quiescence.” Before, the four unions competed aggressively against each other for members by demanding and advertising ever greater benefits. But, by segregating worker categories into separate unions, the benefit competition becomes undermined. Indeed, in formal economic models, when two or more unions are composed of members who complement each other, as opposed to substitute, wage restraint prevails and strike risk declines. For example, since clerical workers, LPNs, and RNs all complement each other, if any one group decided to strike it would harm the other two making their opposition more likely.

It is too early to tell whether the reorganization of DHAs and bargaining units will actually save money. Like rearranging deck chairs on the Titanic, it seems like the number of Health Districts gets tweaked every so often with little to show for it. However, more important than capturing near-term efficiencies is whether these changes will improve the chances of more substantial reforms to healthcare provision going forward.

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