The old ways of economic development

Someone told me the other day that their boss said he was very uncomfortable giving financial incentives to a company that had no corporate debt. He was very uncomfortable, in other words, giving taxpayer dollars to a company that “doesn’t need it”.

Now this may seem intuitively like an realistic statement but in fact it goes to the core of why much of our economic development has been such a failure in Atlantic Canada.

Don’t confuse the issues. This is not about governments providing incentive programs. We can agree or disagree on the value of incentive programs and even on the legitimacy of such programs. That is not the point here.

My point here is that if we do provide incentives we have to provide them to companies that have good balance sheets and have good business models. Why would we risk taxpayer dollars on bad companies and suspect business models?

For many years -decades in fact – a lot of old school government economic developers believed that it was the government’s role to step in when the private capital markets didn’t fill a local need. Or it was their role to fund local companies that couldn’t get bank financing or it was their role to be “lender of last resort”.

As a result, a lot of government funding went to projects that had suspect business models, were not adequately capitalized or were provided funding because of political motivation.

In my opinion, putting aside the rightness or wrongness of incentives, if we are in the game, we should look for good companies with good business models.

The dirty little secret is that places like Atlantic Canada end up giving funds to tier two or three projects (in terms of quality) while places like Quebec and Ontario fund big name, well branded multinational corporations. Sure there is potential for those firms to fail but it is far more likely that a cottage cluster in New Brunswick funded with 60% government money will fail than a billion dollar auto plant in Ontario. It’s just that when the latter fails it is more spectacular.

I am shocked at just how many people in the upper echelons of the ‘economic development’ system in Atlantic Canada really don’t know the mechanics of economic development.