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

Revitalizing Atlantic Canada

Writing for Free Exchange allowed me to examine a multiplicity of issues facing Atlantic Canada and the following are some that I have found to be of paramount importance.

The most prominent issue in Atlantic Canada is slow economic growth, which has resulted in an enormous outflow of skill labourers, young professionals, and families who have left for British Columbia, Alberta, and Saskatchewan to find work. Economic growth rates in New Brunswick, Nova Scotia, and Prince Edward Island, for instance, have fallen below the national average of 2 per cent in 2013. Newfoundland and Labrador, which is currently booming due to oil production, is somewhat of an exception, however, declining revenues threaten to derail the province’s path to prosperity. In addition, the three Maritime Provinces experienced declining populations in 2013.

NL’s growth is largely attributable to strong oil and gas production, which has been growing in the province since the mid-2000s. The rest of Atlantic Canada could benefit from NL’s model and the region may need to look toward the oil and gas sector. New Brunswick currently boasts an opportunity to host the Energy East Pipeline and has a prospective shale gas industry. Other opportunities include increased cooperation or shared services between the three Maritime Provinces and exploring trade prospects with emerging markets.

Another problem facing the region, and the entire country, is unfunded liabilities. In other words, public sector pensions are a significant issue that plagues both federal and provincial government. This is where Atlantic Canada can lead: New Brunswick and Nova Scotia both made changes to their pension programs and the rest of Canada could learn from their progress.

In addition, Canada’s healthcare system requires additional consideration and policymakers must look into issues plaguing it. Through the Canada Health Transfer, the federal government allocates funds to the provinces to assist them with growing wait lists, quality assurance, and a number of other issues. However, progress has been futile. The federal government has given $41 billion in additional healthcare funding since 2004, yet, in 2010, Canada ranked last out of 11 countries in terms of wait times. This is why policymakers should consider alternatives to the status quo.

There are also serious democratic issues facing the country. The Senate remains unelected and unaccountable, and the Supreme Court’s recent ruling inscribed the current structure in stone. Its ruling does not need necessarily indicate defeat, though, and the Prime Minister, in addition to supporting premiers, must take the lead and ensure reform to the Upper Chamber.

While many Canadians may agree that these issues are of great importance, there must be action. We often criticize the political sphere for not dealing with these issues adequately, however, the truth is that we, as electors, must show that they are a priority or politicians will not give them due consideration. It is our duty to ensure that ideas, such as natural resource development, prudent fiscal management, and adequate healthcare, receive fair scrutiny, rather than arbitrarily dismissing them from the outset; it is our duty as citizens to place them on the political agenda.

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