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Mega-project planning and economic welfare : a case study of British Columbia's North East Coal Project Knight, Nancy 1990

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MEGA-PRO J E C T PLANNING AND ECONOMIC WELFARE: A CASE STUDY OF BRITISH COLUMBIA'S NORTH EAST COAL PROJECT By Nancy Knight B.Sc, Simon Fraser University, 1980 M.R.M., Simon Fraser University, 1986-A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE STUDIES School of Community and Regional Planning We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA December 1990 (c) Nancy Knight, 1990 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of {^jA^^^^Zy^ 6LSIA.<?{ ~%.-€ Qt-i K g ^ f /.A/Q-^ The University of British Columbia Vancouver, Canada Date DE-6 (2/88) ii ABSTRACT This research investigates the characteristics of natural resource mega-project planning processes. The implications of staple theory and selected characteristics of natural resource mega-projects are used to construct eleven characteristics of such planning processes. Staple theory suggests that optimistic expectations will be a fundamental characteristic of resource development planning in Canada, and that the state's role will be to facilitate, rather than evaluate, staple production. The size, complexity, visibility, and meaning of mega-projects may create momentum around them that weakens rational analysis and stampedes the planning process. Overall, the planning process may focus on narrow, technical issues concerned with constraints facing the mega-project. Alternatives may not be considered, overly optimistic expectations may not be checked, and risk and uncertainty may be inadequately addressed. These proposed planning process characteristics are investigated in a case study of British Columbia's North East Coal Project (NECP). The institutional structure of the planning and implementing organizations are investigated, and the major planning issues are identified. The expectations generated within the planning process regarding the mega-project's contribution to regional economic growth and development, and its economic viability are reviewed, and then evaluated by comparing them to information available at the time from sources within the planning process and from sources outside the planning process, and to actual outcomes. The case study findings support many of the eleven proposed characteristics of natural resource mega-project planning processes. The NECP ' s public planning process focused on identifying and overcoming constraints that would prevent the mega-project proceeding, and on minimizing the costs of the public sector's infrastructure responsibilities in the mega-project. The terms of reference for the various Sub-Committees requested analyses iii of constraints in most cases. The absence of a Regional Development Sub-Committee in the organization of the planning task force suggests that longer term planning issues were not perceived to be as important as the infrastructure issues. Sixty percent of the official public planning budget was allocated to transportation and townsite studies. The mandate, structure and operations of the government's implementing organization focused on controlling project costs. Finally, the benefit-cost analysis of the mega-project did not consider any alternatives to the N E C P . The expectations regarding the NECP ' s contribution to regional economic growth and development were overly optimistic given the information available at the time, and far exceed the actual outcomes to date. The N E C P stabilized the South Peace region during the recession of the early 1980s, and produced some growth in employment, population, and income levels. Also, education levels increased and some entrepreneurial development occurred. However, the mega-project did not alleviate the unemployment situation in the region, did not improve the distribution of income, and it did not diversify the regional economic structure. Despite the early planning emphasis given to the opportunities that the N E C P could provide to members of regional target groups such as Natives and women, few individuals from these groups obtained mining employment. In 1986, most of the direct economic benefits associated with the N E C P , such as the new employment opportunities, high incomes, and training opportunities, had been captured by in-migrants to the region. The expectations regarding the NECP ' s economic viability were also overly optimistic given information available at the time. The possibility of capital cost overruns were not considered despite ample indication that they were highly probable. Continuing high prices were assumed despite historical evidence that periods of high prices had been consistently followed by sustained periods of low prices, and expert advice that structural forces would iv contribute to a continual decline in the Japanese demand for metallurgical coal. The pre-project analysis projected that the NECP ' s net present value would be $464 million (1980$C), but the ex post analysis suggests that the N E C P will generate $955 million (1980$C) in net economic losses for the Canadian economy. The overly optimistic expectations regarding the NECP ' s economic viability were formed early in the planning process and were based on a period of enormous increases in metallurgical coal prices. As market conditions changed, the group within the planning task force responsible for the NECP's economic evaluation lowered their expectations, but their concerns were apparently insufficient to counter the momentum that had been established around the N E C P . This momentum was reinforced by the meaning attached to the N E C P , which was portrayed as a fundamental component of BC's economic development strategy. Risk and uncertainty were inadequately addressed within the planning process and within the technical analyses of this mega-project's regional economic impacts and economic viability. No sensitivity analyses were completed in the analysis of the NECP ' s regional economic impacts. The sensitivity analyses in the pre-project benefit-cost analysis all considered positive adjustments to the base case scenario, save one. Problems of geological uncertainty, and the lack of experience of the project proponents in coal mining were ignored. Mega-project planning processes must be carefully designed to counter the characteristics suggested by this research. A t a minimum, a full public review of the mega-project should be conducted before the decision to proceed is taken. Consideration should be given to developing a formal, required mega-project planning process based on the two-tiered structure. The first tier would include a policy assessment addressing broad questions V such as alternative regional development strategies. If the outcome of the first tier was a decision to proceed with a mega-project, the second tier would address mega-project planning and regulatory issues such as infrastructure options and impact management strategies. vi TABLE OF CONTENTS ABSTRACT i i TABLE OF CONTENTS vi LIST OF TABLES viii LIST OF FIGURES x ACKNOWLEDGEMENTS xii GLOSSARY xiii 1 INTRODUCTION 1 1.1 Research Problem 3 1.2 Purpose and Objectives 9 1.3 Study Methods 10 1.4 Scope and Definitions 13 2 NATURAL RESOURCE MEGA-PROJECTS AND ECONOMIC DEVELOPMENT: SOME CHARACTERISTICS OF PUBLIC PLANNING PROCESSES 2.1 Introduction 17 2.2 Natural Resources and Economic Development: The Creation and Persistence of a Staple Mentality 19 2.3 Natural Resources and Economic Development: The Role of the State 39 2.4 Natural Resource Mega-Projects and Economic Development: Some Characteristics of Public Planning Processes 51 3 THE NECP: HISTORY OF A MEGA-PROJECT AND DESCRIPTION OF THE PLANNING PROCESS 3.1 Introduction 77 3.2 History of the N E C P 85 3.3 The Public Planning Process 107 3.4 Summary 133 4 THE NECP AND REGIONAL ECONOMIC GROWTH 4.1 Introduction 139 4.2 The NECP's Regional Demo-Economic Impacts: The Pre-Project Projections and an Ex Post Analysis 142 4.3 Evaluation of the Pre-Project Analysis 155 4.4 Summary 164 vii 5 THE NECP AND REGIONAL ECONOMIC DEVELOPMENT 5.1 Introduction 168 5.2 Method 172 5.3 The NECP ' s Impacts on Regional Economic Development 179 5.4 The Distributional Effect of the NECP ' s Impacts on Regional Economic Development 202 5.5 Summary ..234 6 THE NECP'S ECONOMIC VIABILITY 6.1 Introduction 237 6.2 Summary of the Pre-Project Analysis 238 6.3 The Ex Post Analysis 247 6.4 Evaluation of the Pre-Project Analysis 264 6.5 Summary 296 7 SUMMARY, CONCLUSIONS AND PLANNING IMPLICATIONS 7.1 Summary 301 7.2 Discussion and Conclusions 308 7.3 Planning Implications 315 7.4 Opportunities for Further Research 318 LITERATURE CITED 321 APPENDIX 3A Chronology of the N E C P 338 APPENDIX 3B Bibliography of N E C P Planning Documents 354 APPENDIX 4A Regional Economic Impact Analysis Using Employment Multipliers: Theoretical Basis and Empirical Estimation 361 APPENDIX 5A Summary of Interview Results, Copies of Interview Schedules, and List of Interviewees 371 APPENDIX 6A Ex Post Benefit-Cost Analysis Data Sources and Assumptions 387 APPENDIX 6B Summary of Background Market Studies 403 LIST OF TABLES Selected Characteristics of Some Natural Resource Mega-Projects in Canada Suggested Characteristics of Natural Resource Mega-Project Planning Processes NECP Public Planning Budget by Expenditure Category as of March 31, 1981 Summary of Pre-Project and Ex Post Demo-Economic Impact Analyses Employment Multipliers: Selection of Published Estimates, 1980 Regional and Non-Regional Hires, Quintette Coal Limited, 1982-1989 Forecast and Actual Population and Employment, Non-Native Communities in the South Peace, 1986 Average Household Income and Unemployment, Non-Native Communities in the South Peace, 1981, 1986 Net Present Value of Net Benefits, Financial Appraisal, Pre-Project Analysis Comparison of Results, Central Case Analysis and Sensitivity Analyses: Pre-Project Analysis Net Present Value of NECP, By Component: Ex Post Financial Analysis Comparison of Net Present Value of NECP, by Component: Pre-Project and Ex Post Analysis Percentage of the Difference Between the Pre-Project and Ex Post Analysis Accounted for by Major Project Variables Difference in Net Present Value of Capital Costs, Pre-Project and Ex Post Analysis: By Project Component Assumed Metallurgical Coal Prices in Base Case Scenarios, Pre-Project and Ex Post Analysis Difference in Operating Cost Assumptions, Pre-Project and Ex Post Analysis: By Component Difference in Volume Assumptions: Pre-Project and Ex Post Analysis Economic Adjustments in the Pre-Project Benefit-Cost Analysis Net Present Value of the N E C P , Pre-Project and Ex Post Analysis Including Economic Adjustments: By Project Component Distribution of Net Benefits, Inclusive and Exclusive of Corporate Income Tax Payments: Pre-Project Analysis Capital Costs, Initial Estimates Versus Actual: Selected Large Public Investment Projects Japanese Crude Steel Production and Metallurgical Coal Imports, 1974-1986 Projections of Japanese Metallurgical Coal Imports, Compared to Pre-Project Projection Estimated Total Costs/MT F O B , Metallurgical Coal Mines: By Country Metallurgical Coal Price/MT, Balmer Mine and Pre-Project Projections X LIST OF FIGURES 2.1 Backward, Forward and Final Demand Linkages to Staple Production 21 3.1 Average Metallurgical Coal Export Prices, Canada to Japan, 1960-1984 81 3.2 Coalfields in British Columbia 86 3.3 Potential Coal Properties in the Peace River Coalfield, BC 87 3.4 Institutional Structure of the NECP Public Planning Process 91 3.5 The North East Coal Project 100 3.6 North East Coal Development Office Organization Structure 118 4.1 South Peace Study Area 141 4.2 Flowchart of Demo-Economic Impact Analysis 143 4.3 Comparison of Employment and Population Impacts, Pre-Project and Ex Post Analyses 154 5.1 South Peace Employment, 1971-1986, Showing Estimated Effect of the NECP 181 5.2 South Peace Population, 1961-1986, Showing Estimated Effect of the NECP 182 5.3 Relative Participation and Unemployment Rates, South Peace and BC's Resource-Based Regions 1981, 1986 183 5.4 Relative Per Capita Incomes, South Peace and BC's Resource-Based Regions 1980, 1985 186 5.5 Relative Household Income, South Peace and BC's Resource-Based Regions 1980, 1985 187 5.6 Distribution of Personal Income, South Peace Region 1980,1985 189 5.7 Relative Education Levels, South Peace and BC's Resource-Based Regions 1981,1986 191 5.8 Relative Industrial Structure, South Peace and BC's Resource-Based Regions 1981,1986 194 5.9 Relative Occupational Structure, South Peace and BC's Resource-Based Regions 1981,1986 198 Relative Per Capita Value of Commercial and Industrial Building Permits, South Peace and BC's Resource-Based Regions 1981, 1986 Age Structure of Regional Residents and In-Migrants: South Peace 1986 Household Structure of Regional Residents and In-Migrants: South Peace 1986 Participation and Unemployment Rates of Regional Residents and In-Migrants: South Peace 1986 Personal Income Distribution in Regional Resident and In-Migrants Populations: South Peace, 1986 Household Income Distribution of Regional Resident and In-Migrant Populations: South Peace 1986 Highest Level of Schooling Obtained in Regional Resident and In-Migrant Populations: South Peace, 1986 Distribution of Experienced Labour Force by Industry in the Regional Resident and In-Migrant Populations: South Peace 1986 Distribution of Experienced Labour Force by Occupation in the Regional Resident and In-Migrant Populations: South Peace 1986 Relative Participations and Unemployment Rates and Average Per Capita Income, for Women in the South Peace and BC's Resource-Based Regions, 1981, 1986 1984 Cost Curve for Global Metallurgical Coal Exports History of Western Canadian Coking Coal Prices History of U S Bituminous Coal Prices, 1870-1977 ACKNOWLEDGEMENTS M y gratitude to my husband, Randy, and my family and friends, who, in numerous ways, encouraged and helped me to begin and complete this degree. Thanks to my Committee. Tom Gunton generously spent many hours discussing ideas with me, and he commented extensively on thesis drafts. Tom's interest in this research never flagged, and his conviction that it was an important study was always a source of inspiration for me. Brahm Wiesman provided useful guidance throughout my study program, and responded thoughtfully and quickly to everything I gave him to read. Craig Davis's enthusiasm for my research topic provided important support during the long process of researching and writing this thesis. Numerous funding agencies made it possible to undertake this degree. The Izaak Walton Killam Memorial Foundation, the Social Sciences and Humanities Research Council of Canada, the University of British Columbia and the Government of British Columbia provided crucial scholarship support. The Natural Sciences and Engineering Research Council of Canada also offered scholarship support. Research funding was provided by the Canadian Environmental Assessment Research Council, the Social Sciences and Humanities Research Council of Canada, and Energy Mines and Resources Canada. I also benefitted from one teaching assistantship in the School of Community and Regional Planning. The Centre for Human Settlements at U B C provided office space during last year and a half of my program while I was writing the dissertation. M y thanks go out to the nearly seventy people from the South Peace who participated in interviews regarding the NECP ' s impacts on the regional economy. Also, thanks to Peter Boothroyd and Kris Olds, of the School of Community and Regional Planning and the Centre for Human Settlements respectively, who assisted me with the distributional analysis of the NECP ' s regional economic development impacts. xiii GLOSSARY 1980$C 1980 Canadian dollars 1980$US 1980 United States dollars BC British Columbia BCR British Columbia Railway BOC Bullmoose Operating Corporation C N R Canadian National Railway EIA Environmental Impact Assessment E C C Economic Council of Canada F O B Free on Board IEA International Energy Agency JSI Japanese Steel Industry M M T Million Metric Tonnes M M T P Y Million Metric Tonnes Per Year N E C D O North East Coal Development Organization/Office N E C P North East Coal Project N H B National Harbours Board Q C L Quintette Coal Limited R T N A S Rio Tinto North American Services Ltd. S E B J Societe d'Energie de la Baie James SRI Stanford Research Institute U B C University of British Columbia 1 CHAPTER ONE INTRODUCTION Natural resource mega-projects are some of the largest investments undertaken in Canada. They have been used as a policy approach to regional economic development, and have tremendous technological, political, and emotional appeal. Further, mega-projects are persistent and tend to appear and re-appear on the Canadian economic scene. Yet they are very complex undertakings and are surrounded by uncertainty. Taken together, these factors suggest it is imperative that we improve our understanding of natural resource mega-projects. This research suggests that the characteristics of natural resource mega-projects, combined with the staple mentality that permeates resource development planning in Canada, may create problems in the planning process. The size and symbolic meaning of the mega-project, supported by the formation of overly optimistic expectations regarding the potential contribution of natural resources to regional economic development, may weaken rational analysis and stampede the planning process. The planning process may focus on facilitating the mega-project, rather than evaluating it. Insufficient planning attention may be directed towards problem definition or alternative generation, and the process may become focused on maximizing short-term benefits and minimizing short-term costs. The risk and uncertainty associated with mega-projects may be systematically understated which may result in a 'great planning disaster' (Hall 1980), where enormous public resources are committed to a policy or project that does not achieve its objectives. In the case examined here, the public planning process, during its analysis and evaluation phase, focused on identifying the most efficient set of infrastructure investments to support the private sector components of the mega-project. The planning task force did not 2 consider prior questions, such as potential alternatives to the mega-project. It was implicitly assumed that by providing infrastructure support for the mega-project, the government was developing the region. For example, there was no Regional Development Sub-Committee within the planning task force, yet there were Sub-Committees for Transportation and for the Townsite. This focus was reinforced by the great technical challenges presented by the mega-project, especially in its infrastructure components. Planning focused on resolving these issues, and the role of experts within the process was consequently amplified. No procedural arrangements were made to facilitate the participation of regional representatives or the general public in the analysis and evaluation phase of the planning process. Momentum built around the mega-project and within the planning process, and high expectations were formed regarding the contribution of the mega-project to regional economic development. The risk and uncertainty surrounding the mega-project, which grew as external conditions changed, were understated. The questionable economic viability of the mega-project was apparently insufficient to prevent the project from proceeding. In the implementation phase of the planning process, the government's major concerns were project management and impact mitigation. The enormous challenges presented by building such a complex project on time and on budget may have diverted planning attention away from the government's other objectives of regional hiring and procurement. Given the high probability that mega-projects will continue to be developed in Canada, more research is required to determine whether the characteristics of mega-project planning processes observed in this case are supported by other cases. If similar findings emerge, new designs for mega-project planning processes will be required to counter the problems, improve the contribution of these projects to regional economic development, and 3 prevent great planning disasters. Over the long term, these new designs could also lessen the influence of a staple mentality in resource and economic development planning. 1.1 RESEARCH PROBLEM Context In 1981 the federal government announced its long-term economic development strategy based on natural resource mega-projects. The national economic strategy integrated the cumulative strategies of the private and public sectors across Canada that were formulated during the 1970s, a time of unprecedented energy price increases. Not surprisingly, the majority of the mega-projects were in the energy sector and many involved the application of new technology at a pioneering scale, often in frontier locations. The magnitude of the mega-projects detailed in the economic strategy was stunning, with planned investments over the last two decades of the 1900s totalling $440 billion (Canada 1981b). The expectations attached to the mega-project strategy were equally grand. According to the federal government's analysis, mega-projects offered enormous opportunities for national economic growth and linked industry development (Canada 1981b). In addition, mega-projects promised to make significant contributions to regional economic development, a central concern of Canadian politics. The federal Minister of Industry said The development of major projects can play a critical role in fostering regional economic diversification, enhanced economic growth and industrial restructuring in Canada, (quoted in Boothroyd 1981, 66). Like their federal counterparts, provincial politicians were also swept up by the promise of the mega-project strategy. Higher provincial tax revenues and general economic buoyancy 4 were anticipated outcomes of the mega-project investments. Regional development was expected to follow naturally from the mega-projects' locations outside provincial metropolitan centres. In addition, the mega-project investments suggested a shift in the balance of national economic power away from central Canada in favour of provinces and territories traditionally on the fringe of the Canadian political economy. In the early 1980s, natural resource mega-projects were being seriously examined by provincial governments from coast to coast. The unique, massive and complex nature of mega-projects required new public planning processes to deal with the myriad of issues these projects stimulated (Sewell 1987), and during the 1970s and early 1980s, new approaches were emerging. O'Riordan (1984) grouped these planning approaches into three categories; creation of project-specific inquiries, extension of existing regulatory systems to address additional concerns, and creation of new institutional arrangements. None of these innovations have been completely and consistently effective or efficient in planning mega-projects. Common criticisms are that uncertainty is inadequately addressed, that the decision to proceed is therefore often based on inadequate information or questionable assumptions, and that the planning process does not place the mega-project in a broader policy framework (O'Riordan 1984; Sewell 1987; Rees 1980a; Rees 1984a; Rees 1989; Marshall et al. 1986; Sadler 1990). After a temporary slowdown associated with the recession of the early 1980s, the pace of resource mega-project development is again accelerating. Plans are underway for construction of the second phase of Quebec's James Bay hydroelectric complex, the Conawapa dam in Manitoba, and the Site C dam in British Columbia. Several oil-sands mega-projects in Alberta and the Hibernia project in Newfoundland have recently received government financial support, and the stage is apparently set for a northern pipeline. 5 Given this renewed emphasis, additional research on natural resource mega-project planning processes is required. The findings could make an important contribution to the design of future mega-project planning processes that could improve the contribution of natural resource mega-projects to regional economic development. Problem Statement A favoured approach to mega-project planning in Canada has been to adapt existing regulatory processes to the project, often by broadening the terms of reference for environmental impact assessments and associated review panels and public hearings. In northern Canada, the federal government's environmental assessment and review process (EARP) has been applied to a number of mega-projects, and in most cases the issues at stake required more from the process than a project-oriented environmental impact assessment. For example, the terms of reference given to the panel responsible for the Beaufort Sea E A R P were very broad, requesting an impact assessment of the development concept of northern hydrocarbon exploitation rather than a specific hydrocarbon project (Rees 1984a). The large role of environmental impact assessment (EIA) and environmental concerns in mega-project planning processes is not surprising given the enormity of these projects' potential impacts and the public's environmental consciousness (Sewell 1987). As a result of EIA's prominent role, researchers and participants have concentrated on evaluating the existing or modified E I A processes, and have made recommendations for further adaptations and improvements in this important aspect of the planning process (Boothroyd and Rees 1984; Rees 1984a). ^ The research on E I A processes is action-based, innovative, 1 The recommendations have included strengthening procedural elements within EIA processes (Rees 1980a), establishing monitoring programs (Krawetz et al. 1987), instituting more community-based impact assessment, monitoring and management (Rees 1989), establishing frameworks for cumulative impact assessment (Sonntag et al. 1987), 6 and at the leading edge of the field (Marshall et al. 1986). In terms of its contribution to research on mega-project planning processes, however, two issues emerge. First, due to the large role of impact assessment, existing research is focused overwhelmingly on analyzing this aspect of the mega-project planning process. Thus, while several authors have noted the inherent limitations of EIA in addressing the broader issues raised by a mega-project (Rees 1984a; O'Riordan and Sewell 1981; Sadler 1990), systematic theoretical or empirical explorations of the characteristics of more comprehensive mega-project planning processes is lacking. This limits the potential contribution of existing research to the design of future mega-project planning processes. Second, existing research has consistently pointed to the lack of ex post analyses of mega-projects' socio-economic impacts. Clearly, ex post analyses are crucial to improving our expectations regarding these impacts and any planning efforts that might be directed towards them. This research addresses these issues by using a fresh theoretical perspective in a systematic examination of a comprehensive planning process for a natural resource mega-project, and by completing an ex post analysis of the mega-project's impacts on regional economic development. Another perspective on mega-project planning processes is provided by staple theory and related writings in Canadian political economy. In that literature, a number of authors have pointed to the difficulties created by relying on natural resources in an economic development strategy, particularly when resource exploitation involves capital-intensive technologies (Innis 1930; Mackintosh 1939; Watkins 1963; Richards and Pratt 1979; Gunton and Richards 1987). These difficulties include: improving procedural elements for incorporating scientific information (Marshall et al. 1986), improving the form and nature of public participation (Canada 1988), and integrating EIA more completely into project design and community development planning (Boothroyd and Rees 1984). 1) dependence on volatile export demand that is beyond regional control, 2) the tendency for capital intensive, 'lumpy' investments to create economic rigidities that are keenly felt when the high fixed debt servicing charges are combined with the volatile and uncertain revenue flows, 3) generation of a 'staple mentality' which causes resources to be invested in , uneconomic staple expansion, and 4) the potential for a 'staple trap' to emerge where the economy becomes dependent on a narrow resource base that is vulnerable to exogenous factors and subject to decline once the resource base is exhausted or when structural shifts in demand occur. This literature raises a number of substantive concerns that should be addressed in a planning process, but this research focuses on the implications of a staple mentality for natural resource mega-project planning processes. Staple theory suggests that, in economies dominated by resource extraction and export, there is a tendency for a staple mentality to develop that places excessive, and often unwarranted, emphasis on the natural resource sector in the economy. As Canada's leading economic historian Harold Innis observed: Energy has been directed toward the exploitation of staple products and the tendency has been cumulative ... Energy in the colony was drawn into the production of the staple commodity both directly and indirectly. Population was involved directly in the production of the staple and indirectly in the production of facilities promoting production. Agriculture, industry, transportation, trade, finance, and governmental activities tend to become subordinate to the production of the staple for a more highly specialized manufacturing community. (Innis 1930, 385). The dynamics of the staple mentality's development and persistence in Canada are complex. A key variable, however, is the expectations formed by staple sector participants. Theorists have argued that the staple mentality is consistently supported by the formation of overly optimistic expectations regarding the potential contribution of 8 resources to regional economic development (Gunton and Richards 1987). The predisposition towards overly optimistic expectations formation is rooted in the historical and cultural circumstances of Canadian economic development, such as the particular roles of foreign versus domestic entrepreneur ship. When combined with certain characteristics of mega-projects, such as their size and uncertainty, the staple mentality and the dynamics supporting it may produce significant biases within the planning process, such as a focus on identifying the constraints facing the mega-project rather than a more fundamental analysis of the planning problem. The questions addressed in this research are: 1) what are the implications of the staple mentality for resource development planning processes in Canada; 2) what are the characteristics of natural resource mega-projects that could have an important influence on the planning process; 3) how might the selected characteristics of mega-projects interact with the characteristics of resource development planning processes to affect the planning process, particularly the expectations generated within the process regarding the regional economic development impacts; 4) how reasonable are these expectations and how do they compare to actual outcomes; and 5) what are the implications of the research findings for the design of mega-project planning processes. In British Columbia, the North East Coal Project (NECP) is a natural resource mega-project that was planned and implemented using an elaborate, specially-designed, public planning process. A federal-provincial planning task force was created with six Sub-Committees that examined questions related to the coal resource, coal transportation, 9 environment and land use impacts, manpower supply, townsite and community development requirements, and coal economics, finance and marketing. This approach attempted to provide a comprehensive analysis of a broad range of planning issues. The N E C P is the largest single industrial undertaking in the history of B C , and the planning process was one of the most ambitious ever undertaken in Canada. The public planning process spanned an eight year period (1976-1983) and consumed over $13 million. The provincial and federal governments were involved in this joint planning effort to "... ensure that as the development proceeds the people of BC and Canada will receive the greatest possible benefits and minimal adverse impacts." (BC 1981a, 3). The N E C P was completed in 1983 and has been in operation for seven years; it provides an excellent opportunity to conduct further research on planning processes for natural resource mega-projects, and their regional economic development impacts. 1.2 PURPOSE AND OBJECTIVES The research purpose is to investigate the potential influence of a staple mentality and selected characteristics of natural resource mega-projects on the public planning process. The investigation focuses on the formulation and analysis components of the planning process, and the expectations generated regarding the mega-project's regional economic development impacts and economic viability. These expectations are elucidated by reviewing the relevant technical analyses of the mega-project and identifying the key assumptions underpinning these analyses. 2 The formulation and analysis components of the planning process consist of problem or goal identification, alternative generation, and alternative analysis and evaluation. 10 The research objectives are: 1) to review, from the literature, the mechanisms underpinning a staple mentality and its influence on resource-related planning and policy-making in Canada; 2) to review, from the literature, characteristics of natural resource mega-projects that may affect the planning process; 3) to analyze how the characteristics of natural resource mega-projects and the staple mentality might affect a natural resource mega-project planning process; 4) to investigate the characteristics of the planning process for the N E C P , focusing on the formulation and analysis components of the process; 5) to identify and evaluate the expectations formed within the planning process regarding the mega-project's regional economic development impacts and economic viability; and, 6) to elaborate the implications of the research findings for the design of mega-project planning processes. 1.3 STUDY METHODS The research method consists of: 1) a literature review of a) staple theory and related writings in Canadian political economy to explore the origin, evolution and dynamics of a staple mentality, and its influence on resource development planning in Canada, and b) Canadian natural resource mega-projects to identify selected major characteristics, 2) based on the literature reviews, development of research questions regarding general characteristics of planning processes for natural resource mega-projects, 11 3) a case study analysis of the planning process for BC's N E C P , comprised of a) a description of the policy context for this mega-project, b) • a history of the mega-project, c) a comprehensive description of the planning process focusing on problem formulation and analysis, first at an overall level in the planning process, and then within the regional development planning and economic evaluation aspects of the process. The description includes the process's institutional structure, its purpose and objectives, the terms of reference for various planning committees, the planning problems identified, alternatives examined and recommendations made, resource allocation within the process, the timing of decisions, and the relationship of the planning process to external events, and d) an evaluation of the expectations generated within the planning process regarding the NECP ' s regional economic development impacts and economic viability. The assumptions contained in the relevant technical analyses are evaluated by comparing them to other information available at the time, and to actual outcomes. Other information available at the time is divided into two sources; from inside the institutional framework of the planning process (i.e. from the expert consultants) and from outside the planning process (i.e. from the critics and from other published information). The actual outcomes are assessed by completing a comprehensive ex post regional economic impact analysis, and an ex post benefit-cost analysis. 12 Data Sources and Specific Methods To identify selected characteristics of natural resource mega-projects, data sources include newspaper reports, popular articles on mega-projects, government reports, and documents from project proponents. In addition, academic analyses of mega-projects are utilized. The project history covers the period from 1970 to the present, and data sources include newspapers and periodicals, and other published descriptions and analyses of the planning process. The description of the planning process relies primarily on government reports prepared within the N E C P planning process, which are supplemented with other published analyses in popular and academic literature. The evaluation of the assumptions contained in the technical analyses of the NECP's regional economic development impacts and its economic viability draws on information available at the time from inside and outside the planning process. The information provided directly to the planning process is contained in background documents prepared by government departments or consultants; all available documents are critically reviewed and summarized, and the advice contained in these documents is compared to the assumptions used in the planning process. The information available from outside the process is divided into information from critics of the project, and other published evidence regarding the issues being dealt with in the planning process. These documents are summarized and compared to the assumptions used in the planning process. The expectations raised in the planning process are also evaluated by assessing the mega-project's actual impacts on regional economic development between 1981 and 1986, and its current economic viability. The ex post analysis of regional economic development impacts focuses on the South Peace region in northeastern B C and is comprised of: 13 a) analysis of Census data for changes in selected indicators over the 1981 -1986 time period; this analysis examines temporal changes at the regional level, and then disaggregates these changes to examine their distributional effects, focusing on regional residents, in-migrants and target groups (specially ordered cross-tabulations of Census data are required for the distributional analysis); and b) analysis of interviews with key regional informants regarding their perceptions of the regional and community economic development impacts, positive and negative, of the N E C P . The assessment of the NECP ' s current economic viability uses an ex post benefit-cost analysis which follows the methodology of the pre-project analysis but uses actual cost and revenue data wherever possible. Data sources include published analyses of coal markets, prices and costs of production, and publicly available estimates of costs for other components of the N E C P . 1.4 SCOPE AND DEFINITIONS The research scope is limited in several ways. First, the normative concern driving this research is the improvement of the contribution of natural resource exploitation to regional economic development in Canada. Thus, the research does not address the arguments on the role of resources versus manufacturing in economic development that dominate many discussions of Canadian economic development policy (Copithorne 1979; Richards 1985). I believe that natural resource exploitation will continue to play a major role in Canadian economic development, particularly in the West and the North, and that improvements in the contribution of this type of economic activity to regional economic development are possible. 14 Second, this research does not address the emerging arguments regarding the links between resource exploitation and sustainable development. I believe that society's broad goals will evolve slowly towards sustainable development, but that growth will continue to be a central objective in Canadian society for the medium term and that resource exploitation will be perceived as a major means of achieving growth. However, the findings of this research may be relevant to the sustainable development debate. Finally, this research is a macro-level analysis of a technically-oriented planning process, investigating how the public planning problem was defined and how information and technical analyses were used to examine this problem. This focus provides valuable insights into the expectations surrounding the mega-project. This research does not examine the influence of micro-level factors, such as bureaucratic politics or personality conflicts, on the planning process. While not discounting the potential importance of these factors in influencing planning processes, the broader focus is appropriate to the case study. The NECP ' s planning process was designed to be a rational-comprehensive process, and placed its major emphasis on technical analyses of the planning problems presented by this mega-project. Examining this process from a similar perspective is reasonable. In the broadest sense, planning and policy making have been used to denote rational choice aimed at bringing about some state of the world consistent with a predetermined collective end (Payne 1987). Innis de Neufville (1986) defines planning as a set of activities intended to improve the quality of decisions for a community and help prepare for its future. This definition appears to separate planning from implementation and monitoring. There is now fairly widespread recognition that separation of these activities conceptually or organizationally is unwise (Mintzberg and Jorgenson 1987), and Innis de Neufville's definition would be improved by including these activities. Perhaps the definition should be 15 rephrased slightly to say, planning is a set of activities designed to improve the quality and outcomes of a community's decisions, and to help prepare for its future. The set of activities making up planning was traditionally argued to be primarily technical analysis of problems or alternatives, but communicative activities such as negotiation, mediation, and social learning are increasingly being accepted as planning activities (Forester 1989). Clearly, planning involves applying knowledge to solve a socially-defined problem or to meet a socially-defined goal, and is underpinned by some positive purpose to change the future. The planner's role in the process may include assisting a community to define social goals or problems, preparing and analyzing alternative solutions, and/or implementing a chosen strategy. Planning takes place within a social and organizational context, and elements of planning theory address how the 'ideal' rational-comprehensive model (comprised of problem/goal identification, alternative generation, evaluation, choice, implementation, monitoring and feedback) is affected by its contextual setting. Lindblom (1959) argued incrementalism is a more apt description of how policy and planning processes work, and his work encouraged planning theorists to apply theories of political science in their analyses of planning processes. For example, the role of interest groups in affecting goal or problem definition, alternative generation and choice has been examined, as has the role of bureaucrats in implementation. Gunton and Richards (1987) argued that Olson's (1982) model of concentrated benefits and diffused costs is useful in interpreting and understanding the dynamics of the policy-making and planning processes in the Canadian resource sectors. 16 The incrementalists' description of planning and policy-making as a drifting, muddling activity has been criticized. Mintzberg and Jorgensen (1987) and others (Doern and Phidd 1983) have argued that there is a subtle order within the process. Surely there is more to the process than the leaping from crisis to crisis, or the randomness of mutual adjustment. Can these be any more than caricatures of the policy-making process? ... Surely something has been driving that process. Some may prefer to call it ideology, or bureaucratic momentum, or group think, but that consistency is captured neither by the traditional models of rationality nor by the contemporary ones of politics and incrementalism. (Mintzberg and Jorgensen 1987, 218). Many planning theorists use Marxist theory to examine the role of ideology in the planning process, and argue that broad structural forces are very important in affecting the definition of problems or goals and in the consideration of alternatives. Staple theory provides useful insights into the structural forces operating in Canadian resource policy-making and planning. Gunton and Richards (1987) argued that a staple mentality may fundamentally limit the range of choices or alternatives considered in resource planning. This research explores the working hypothesis that, in the area of resource development planning in Canada, the staple mentality is an important structural force affecting the planning and policy-making process. We now turn to a closer examination of the staple mentality and its potential effects on natural resource mega-project planning processes. 17 C H A P T E R TWO N A T U R A L R E S O U R C E M E G A - P R O J E C T S A N D E C O N O M I C D E V E L O P M E N T : S O M E C H A R A C T E R I S T I C S O F P U B L I C P L A N N I N G P R O C E S S E S 2.1 I N T R O D U C T I O N The role of natural resources in economic development has been a central concern of Canadian political economy. The staple thesis is one of the major contributions in this literature (Watkins 1989), and it deals specifically with the relationship between resource exploitation and economic growth and development in a new country. The staple thesis provides an analytical framework for understanding the economic and cultural implications of exploiting and exporting natural resources as the primary element in an economic development strategy. As Watkins has argued, the staple thesis offers an analytical approach which focuses "... on a specific activity as a unifying theme around which to organize a vast array of experience." (Watkins 1989, 25). Following Bertram (1963, 75), staple industries are those "based on agriculture and extractive resources, not requiring elaborate processing and finding a large portion of their market in international trade." Bertram included primary manufacturing within the staple industry definition, thus expanding it beyond extraction activities. Primary manufacturing is restricted to the upgrading of the staple product into a standardized intermediate good, such as pulp. Two themes from the staple approach are particularly helpful in understanding mega-project planning processes. The first concerns the mechanisms underpinning the creation and persistence of a staple mentality, and the potential effect of this phenomenon on the Canadian political economy. The mechanisms are complex and include the country's 18 colonial origins, the persistence of oligopolistic economic structures which are suited to staple-oriented economies, the large role of foreign investment and entrepreneur ship, and the tendency towards the formation of overly optimistic expectations regarding the potential of staple production to stimulate economic growth and development. A staple mentality may lead to overinvestment in staples, at the expense of better economic opportunities in other sectors. The second theme is the role of the state in a staple economy. The demands of staple production require state support, and the traditional role of the Canadian state has been to provide or improve access to new geographical frontiers in the form of infrastructure and a favourable policy environment. However, Canadian governments tend to rely on market mechanisms rather than state intervention to capture the linkages promised by staple production. This rentier philosophy in government tends to support, rather than counteract, the effect of a staple mentality. When combined with the political and technological attraction of mega-projects, these forces may exert a powerful influence on the public planning process. Government involvement to improve access to the staple may be perceived as a key issue by all participants. This problem definition may fundamentally affect how issues are formulated within the planning process. There may be a propensity to overlook the inherent risks of mega-projects, and instead focus on minimizing the short-term costs associated with the particular mega-project. The contribution of natural resource mega-projects to regional economic development may be substantially less than expected. The mega-projects may increase the state's fiscal burden and perpetuate the economy's rigidities. The chapter begins with an outline of the staple thesis which reviews the key parameters in the model linking natural resources and economic growth. Then related work in the Canadian political economy literature on the cultural and institutional implications of staple-led economic development is reviewed, drawing out the insights related to the 19 creation and persistence of a staple mentality. Next, the role of the state in staple development is analyzed. Various explanations for the failure of Canadian governments to extract more benefits from staple production are examined. The discussion then turns to natural resource mega-projects. The characteristics of natural resource mega-projects are identified and analyzed within the context of the staple thesis to develop some characteristics of a natural resource mega-project planning process. 2.2 NATURAL RESOURCES AND ECONOMIC DEVELOPMENT: THE CREATION AND PERSISTENCE OF A STAPLE MENTALITY The mechanism of how staple exploitation and export could lead to economic growth and development was first delineated in a formal model by Watkins (1963). This staple model of economic growth is a variant of the Keynesian disaggregated multiplier-accelerator model; instead of domestic investment being the lead sector in the model, staple production is. As Watkins has recently said, "economic growth is a process by which one thing leads to another - or fails to do so." (Watkins 1989, 18). The staple model, in its continually evolving form, presents the attempts of some Canadian political economists to explain the particular pattern of development in the Canadian economy. Many of the major contributions have explored directly or indirectly the mechanisms underpinning a staple mentality in the Canadian economy. These contributions are reviewed below, beginning with the basic framework as presented by Watkins over 25 years ago. The staple model of economic growth is relevant to new countries^ with favourable person/land ratios, an abundance of the staple, and a comparative advantage in the 1 While much of the research in the staple tradition has ignored indigenous people, more work is emerging on this topic as time goes on (Watkins 1977a; Watkins 1977b). This research suggests that if indigenous people are necessary or significant in the extraction of the staple, they will be included in the general development process; if they are not, they will become irrelevant and experience underdevelopment. i 20 staple's production. If there are no cultural traditions that would inhibit staple development, and if the international demand for the staple is strong, there is a high probability that capital and labour will be attracted to the staple industry. The new country will specialize in the extraction and export of the staple, importing capital, labour, o manufactured products, and expertise. Expansion in staple production creates opportunities for the development of other economic activities. The opportunities are classified as backward, forward and final demand linkages (Figure 2.1). Backward linkages refer to industries that provide inputs to staple production; the two major categories are infrastructure linkages and capital goods linkages. Forward linkages are industries that use the staple as an input, such as manufacturing activities. There are two types of final demand linkages. Consumption linkages meet the demand for goods and services generated by the work force in the staple industry. Fiscal linkages are comprised of the generation and disposition of profits, and of resource rents which are defined as a return above normal returns to labour and capital.^ Rents can be further subdivided into differential and monopoly rents. Differential rent may be generated by intramarginal resources with lower production costs than resources produced at the margin. Monopoly rent may be generated by the exercise of market power by resource producers, restricting supply to maintain prices above the competitive 2 Staple exploitation in regions with favourable person/land ratios will result in a high standard of living and expanding domestic markets. The ratio cannot be so low that no domestic markets exist nor so high that there is a large pool of cheap labour which restrains wage rates and prevents growth of a domestic market (Gunton and Richards 1987). 3 In a country with a relatively small population it will not be economically feasible to manufacture many products to meet local demand. Gunton and Richards (1987) have suggested that, in addition to the lack of scale economies, it is necessary to add a condition that disadvantages manufacturing as a potential export industry, such as high transport costs to major markets. This means the region has little option but to specialize in staple production, and import manufactured goods (assuming economic growth is an objective). 4 Watkins did not specifically mention fiscal linkages in his original formulation of the staple thesis; this linkage, and its importance, was identified in later, related work in the staple tradition. 21 FIGURE 2.1 BACKWARD, FORWARD AND FINAL DEMAND LINKAGES TO STAPLE PRODUCTION BACKWARD LINKAGES FORWARD LINKAGES INFRASTRUCTURE CAPITAL GOODS STAPLE PRODUCTION DESIGN, ENGINEERING, & CONSTRUCTION MANAGEMENT MANUFACTURING FINAL DEMAND LINKAGES 22 equilibrium. As Gunton and Richards (1987) illustrate, both types of rents can be substantial. These three types of linkages, when combined, represent the multiplier effect of an expansion in staple exports. They are a crucial component of the contribution of natural resources to economic growth and development. The rate of growth in demand for the staple and the development, or lack of development, of linkages are primary determinants of the rate of growth and the nature of development in the new economy. In addition, the availability of entrepreneurial ability to recognize and develop linkage opportunities, and the ability of these entrepreneurs to adopt technologies developed in older countries are critical elements in the process. The nature of the demand for the staple, particularly its susceptibility to complete collapse, wild fluctuations, or substitution effects, is an important variable in the model. If the demand for the staple is part of a fad such as the popularity of beaver-tailed hats in Europe during the nineteenth century then it is highly susceptible to dramatic shifts due to a change in tastes. If the staple industry has been developed to supplement existing supply in a foreign country then it is likely that the domestic staple industry will be subject to wild swings of boom and bust; when demand exceeds existing supply in the foreign country the domestic staple industry will grow quickly, but when demand falls below the existing supply in the foreign country, production will be drastically reduced in the domestic industry (Bradfield 1988). Finally, the staple, either by itself or through the industrial process it is used in, can be substituted for, creating a decline in growth of demand or an absolute decline in demand. Demand-related considerations are very important to the stability of the staple-led economy, the resource rents generated, and the economy's long-term prospects. 23 Supply-related factors are also important in the staple model. If the quality of the resource base is eroded the costs of production will increase. This can lead to a decline in the resource rents generated and the competitive position of the industry. If better quality reserves are available, the staple region will be displaced by other, lower-cost producers. If lower-cost reserves are not available, the price will rise, resulting in lower demand. Consequently, excellent current information on international supply prospects and plans is a crucial source of information in a staple-led economy. Another critical supply-related factor is the finite nature of many resources; non-renewable resources will eventually be exhausted, and renewable resources have an upper limit of sustainable output set largely by biological constraints. When the supply of a resource is exhausted, the economy will decline unless it is able to shift into production of a new staple or other commodities. Opportunities for linkage development vary from one staple to another. The production function of the staple industry is an important characteristic affecting the nature and extent of linkage development (Watkins 1963).^ A capital-intensive industry presents large opportunities for development of backward linkages. A labour-intensive industry presents large opportunities for development of consumption linkages. The technological sophistication of the staple extraction process may also affect linkage development. Simple forms of staple extraction may not have strong linkages to research and development activities, and so may not spur on this innovative portion of the economy to the same extent that a more sophisticated technology might (Sitwell and Siefried 1984). The staple's geographic dispersion may also have an important influence on the development of backward linkages in the country or region (Bradfield 1988). A broadly dispersed staple creates a different transportation network and offers different opportunities in development of backward linkages compared to a tightly concentrated 5 The production function refers to the mix of capital and labour used in the staple industry. 24 staple. The staple's mass, once extracted, may also influence linkage development particularly as it is reflected spatially. If the staple has a high mass and transportation costs are high, weight-losing forward linkages are more likely to develop in the region or country where the staple is extracted. Finally, linkage development may be constrained by the supply of production factors in the new country. The staple region must be able to borrow capital abroad, and adopt technical knowledge and equipment developed in older countries (Mackintosh 1939, 11). This implies an ample availability of entrepreneurial ability in the staple region, and favourable policies on the part of the domestic and foreign governments regarding trade, investment and migration (Lower 1933). Over the long-run, maintenance of the rapid economic growth achieved through staple exploitation may strongly depend on the successful growth of industries independent of the original staple, or on the creation of a domestic market and manufacturing industry. A region or country that remains reliant upon the staple industry for its economic base may face eventual economic stagnancy and decline because of fundamental changes in market forces, such as substitution effects or resource exhaustion. A region or country confronting the possibility of a declining staple industry due to such fundamental changes has three options: it may develop a new staple to export, shift its resources into activities not related to staples, or allow a reduction in aggregate economic activity. The wider implications of the staple model of economic growth were recognized by the earliest writers in this analytical tradition. Innis argued that each staple created a particular pattern within Canada's institutions and social formations. 25 Concentration on the production of staples for export to more highly industrialized areas in Europe and later in the United States had broad implications for the Canadian economic, political and social structure. Each staple in its turn left its stamp, and the shift to new staples invariably produced periods of crises in which adjustments in the old structure were painfully made and a new pattern created in relation to a new staple. (Innis 1950, 3). Thus the staple approach addresses how economic activity shapes and is shaped by the society's culture and institutions; it is a broad interpretive framework with many themes (Watkins 1982). The staple approach has been used in analyses of a wide range of issues in Canadian political economy, as the following examples demonstrate. Watkins (1977a) used the staple approach to analyze the impact of hydrocarbon exploitation in the Canadian north on the Dene people. In contrast to the fur trade, where the Dene were an integral part of staple production and transport, Watkins argued that the technological and institutional characteristics of hydrocarbon production and trade would marginalize the Dene people, further exacerbating the process of underdevelopment being experienced by aboriginal people in the Canadian north. The disruptive impacts of hydrocarbon production and transportation would negatively affect the renewable resources of the North and thus the traditional Dene economy. Yet the Dene would not be compensated for these losses because their land claim, and thus their rights as resource owners, remained unresolved. In addition, the sophisticated technology of hydrocarbon production and transport would create few linkage opportunities in the North. The Dene would thus be relegated to the role of wage earners and the economic surplus generated by staple production would be drained out of the region, leaving little for re-investment in Dene-controlled economic development projects. Watkins argued these processes would result in the Dene losing their opportunity to influence or control northern resource exploitation and the northern economy, which would affect their ability to pursue independent political rights. Watkins concluded that the Dene would become irrelevant in 26 the future of the North if hydrocarbon production and trade proceeded under the existing institutional framework. ® Richards and Pratt (1979) used the staple approach to analyze changes in the nature of public entrepreneurship in Alberta and Saskatchewan during the post-World War II period. They argued that the populist culture and institutions that grew up around the agrarian, wheat-dominated economy during the first half of the twentieth century were unsuited to the new, mineral staples that emerged during the 1950s. Richards and Pratt argued that the old institutions did not survive the transition to the new staples of hydrocarbons and potash, and that this vacuum was reflected in the passive, rentier relationships established between the provincial governments and the major resource companies. Richards and Pratt argued that it was not until a new domestic elite evolved in each province that institutional changes occurred that fundamentally altered the role of the state in staple production. The provinces then became more aggressive in ensuring the collection of resource rents and development of economic linkages within their boundaries, representing a fundamental change in the nature of public intervention in staple production. While there are numerous insights that can be found in these and other writings in the staple tradition, we will focus on identifying the forces underpinning the creation and persistence of a staple mentality. We will see that this phenomenon is rooted in Canada's colonial background and is supported and reinforced by a wide range of factors including those that influence expectation formation by staple sector participants. 6 Watkins contrasted this situation to the early years of the fur trade where the Dene were an integral part of the staple production and thus not marginalized from this growing economic activity. 27 Mackintosh (1939) argued that investment decision-making in a staple-based economy would be plagued by the formation of overly optimistic expectations in both the private and public sector regarding the potential of resource exploitation to produce economic expansion. The outcome of these unjustifiable expectations would be extensive borrowing by private entrepreneurs, resulting in large debt charges. The fixed nature of these charges coupled with the notoriously variable incomes from staple exports would place these entrepreneurs in periodic crises that would result in bankruptcies and re-organization in the economy. Further, Mackintosh argued that the large capital borrowings and risks involved in staple industries would produce a strong tendency within the private sector to lower the cost of borrowing by involving the government. Government involvement, however, would simply spread the inevitable fiscal crises to the public sector because of the same fluctuating incomes from staples, yet with more serious consequences because of the inflexible nature of public debt. Mackintosh argued that government involvement increased the rigidity of the investment burden inherent in staple-led economic development, and thus should be avoided. There is ... a strong and natural inclination on the part of a new country to borrow extensively and thus build up heavy debt charges. Since incomes derived from the export of raw materials are notoriously variable, the economic difficulties in which new countries so frequently find themselves are coupled with the rigid expenditures occasioned by heavy debt charges. When, as is so frequently the case, an attempt has been made to cheapen the cost of borrowing by lending the credit or guarantee of the government or by the government itself making the necessary expenditures for improvements, economic difficulties find their reflection immediately in the financial difficulties of government. Pioneers are by necessity and selection sanguine people. They are prone to take over-optimistic views of the effects of such community investment on future income and to assume that government guarantees may be given at no cost. (Mackintosh 1939, 11). Mackintosh argued there was a clear link between the formation of overly optimistic expectations regarding the potential of staples to produce enormous economic expansion 28 and two outcomes; the generous and optimistic mortgaging of the private sector by itself, and the assumption by the public and the politicians that government guarantees could be given at no cost (Mackintosh 1939, 11-12). Essentially, Mackintosh was arguing that societies in new countries were prone to downplay the risks of staple exploitation, to their peril. Thus, the government's role in underwriting staple exploitation, usually by undertaking internal transportation improvements, was not perceived by the public or the politicians to be a form of risk-sharing. Staple production was widely held to be a certain path to economic growth. Innis (1930) also noted the exceptionally high level of government involvement in the Canadian economy, particularly in effecting internal transportation improvements. Innis concluded that the major problem of the Canadian economy was the high overhead cost in the private and public realms associated with these transport improvements, and that a primary way to reduce the costs was to encourage development of staple industries at the end of the line (Innis 1930, 398). For Innis, this focus on staple industries, dictated by the need to reduce overhead costs, had a tendency to become pervasive in the economy because of two related phenomena. First, Innis noted that the trade aspects of staple-led economic development, exporting staples and importing manufactured products, would tend to focus energy on the need to find more goods to export because as the new country exported more and earned more income there would be an accompanying tendency to import more. Innis's view was that this would produce a vicious cycle of expanding staple exports and manufactured imports. The second phenomenon was the tendency for the country's energy to become focused on the staple sector either directly in staple production or indirectly in industries that supported staple production. Thus when individuals and 7 He suggested that this level of government involvement was due to efforts to transfer large areas from the fur trade to a new industrialism, i.e. building a new economy. This observation separates Innis from Mackintosh who implied that government simply responded to the demands of the private sector. Innis recognized the interests of governments in economy-building and thus provided a broader interpretive framework than Mackintosh. 29 groups in the country searched for new investment opportunities there was a strong tendency to focus on finding new staples or more of the existing staples. The economic history of Canada has been dominated by the discrepancy between the centre and the margin of western civilization. Energy has been directed toward the exploitation of staple products and the tendency has been cumulative ... Agriculture, industry, transportation, trade, finance and governmental activities tend to become subordinate to the production of the staple for a more highly specialized manufacturing community. (Innis 1930, 385). Innis also observed that staple-based industrial complexes tend to be concentrated and centralized. In Canada's early years, monopolies or oligopolies dominated in trade, finance and transport sectors, and there was a strong centralized government and banking system. Innis argued that the concentrated nature of the economic institutional structures associated with the existing staple industry would facilitate a relatively quick and painless shift, economically speaking, to new staple industries, thus perpetuating the role of the new country. For a shift to a more industrially-oriented economy, Innis argued that an atomistic, competitive institutional framework was required, but he recognized that change in institutional structures is usually slow. Thus, Innis saw these monopolistic tendencies as a major force in the perpetuation of a staple mentality. Watkins (1963), building on the observations of previous staple theorists including Innis and Mackintosh, argued there was a strong tendency for new countries to develop an export or staple mentality that would bias domestic investment toward staple extraction and export. Implicitly, this suggests that based on past experiences with staple trades and industries, overly optimistic expectations would tend to develop which would cause domestic entrepreneurs and investors to be risk prone where staples were involved, yet risk averse to activities not concerned with staple exports (Aitken 1961). The cumulative effect of this staple mentality would be over-investment in the staple sector which, when combined with the cyclical nature of commodity markets, would cause great boom and bust 30 cycles in the economy. Watkins suggested it would be difficult to break the hold of a staple mentality because the incentive to diversify was low when export earnings were high, but under opposite conditions when low export earnings heightened interest in economic diversification, the resources required to pursue diversification were absent. Over the long-term the persistence of a staple mentality could lead to the development of a staples trap, characterized by a faltering economy and a continuing focus on staples that would inhibit recognition of other economic opportunities. Elaborating on the mechanisms implied by Watkins' arguments, Richards (1985) suggested that the tendency to form overly optimistic expectations in staple-based economies results from the general tendency in society to rely on elementary techniques in forming expectations, which is then combined with forces peculiar to staple-based economies. According to Richards, Keynes argued that people form expectations about the future using three techniques: 1) We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been hitherto ... 2) We assume that the existing state of opinion as expressed in prices and the characteristics of existing output is based on a correct summing up of future prospects ... 3) Knowing that our own individual judgement is worthless, we endeavor to fall back on the judgement of the rest of the world which is perhaps better informed. (Keynes 1937, quoted in Richards 1985, 59). Thus there is a strong tendency to assume that present trends will continue indefinitely, particularly when this assumption is supported by other, apparently rigorous, projections. Richards argued that these tendencies are then combined with the optimism of the pioneer spirit that prevails in staple-based economies, and the structural barriers to social learning created by foreign direct investment in the staple industries^ to create the persistent 8 The large capital requirements of many modern staple-based industries increase the probability that multi-national corporations will be involved, and the structure of these corporations, with head office and research and development functions usually located outside the staple region, tends to inhibit 'learning by doing' for domestic interests, 31 phenomenon of overly optimistic expectations on the part of domestic interests in staple production. The characteristics of commodity markets and the timing of investment decisions reinforce the tendency to over-emphasize the staple sector's role in the economy. The enormous growth rates and profits experienced during the early phases of staple exploitation, or in a market upturn, form the basis of expectations regarding future profits and investment decisions. In the rush to exploit a situation of strong demand, existing suppliers expand or new suppliers make plans to enter the market. The independent, large-scale nature of expansions on the supply side often result in overcapacity and declining prices which may threaten the economic viability of new operations. However, as Keynes suggested, during the next period of strong demand and rising prices the investment pattern, and the optimistic expectations underpinning it, repeats itself. Additional insights into the creation and persistence of a staple mentality are provided in the literature concerned with the dependent industrialization debate.^ The increasing presence of US-based multi-national corporations, and perhaps Watkins's (1963) observation that foreign entrepreneurship may restrict itself to export-import functions and so limit linkage development in the staple region, encouraged many investigators to examine the importance of foreign direct investment in the economy and suggest mechanisms by which it created and perpetuated the apparently weak structure of the national economy (Aitken 1961; Watkins 1968; Levitt 1970; Gray 1972). In general, particularly during the early stages of staple exploitation. Further discussion of this point occurs later in this section. 9 The concern of many Canadian political economists during the 1960s and 1970s was Canada's apparently weak economic structure and the instability it engendered, reflected in the peculiarities of the national balance-of-payments. The merchandise trade was dominated by exports of relatively unprocessed resource products and imports of finished goods. The capital account showed huge capital inflows and outflows, with payments for services dominating the outflows. The current account, comprised of the merchandise and capital account, was in a deficit position during most of the 1960s (Voyer and Murphy 1984, 19). 32 these analyses suggested that the high level of foreign direct investment, occurring via multi-national corporations, had strongly contributed to the creation of a 'truncated', ^ uncompetitive economy in Canada with little endogenous entrepreneurial or innovative capacity. In the resource sector, these authors argued that the contribution of natural resources to Canadian economic growth had been significantly curtailed by foreign direct investment. Foreign-owned firms in the Canadian resource sector are often part of a large multi-national corporation that has many branches related to the staple industry. Multi-national corporations may be vertically-integrated firms, with established backward and forward linkages, or they may be specialized staple producers with existing supply and sales relationships with other firms. A corporation with existing plant for processing the staple will be disinclined to build new plant in the staple region, or to sell the staple to another firm attempting to establish a forward linkage in the staple region (Bradfield 1988). The corporation may produce inputs for the staple industry or have existing relationships with backward-linked industries that make them unwilling to enter into relationships with new suppliers (Gray 1972). The limited inclinations of foreign firms to use domestic suppliers, to sell to domestic processors, or to conduct domestic processing may mean there are restricted opportunities for domestic entrepreneurs to develop these linkages (Richards and Pratt 1979). Given the limited markets, access to capital and technology by domestic entrepreneurs may also be severely constrained (Gray 1972), and thus the opportunities to 'learn by doing' may be limited (Richards and Pratt 1979). The end result may be a slower development of domestic entrepreneurial talent than might have been the case, and 10 A 'truncated' economy was defined by Gray (1972) as one having potentially less economic activity than might occur in another, more developed country given the same economic stimulus; this includes fewer supporting services, less training of local personnel in various skills, less product development aimed at domestic needs or tastes, less spillover economic activity, and less decision-making and research and development activity. 33 fewer technical linkages in the staple region than may have been possible if foreign direct investment had not occurred. The tendency of foreign direct investment to restrict domestic entrepreneurial development in the resource sector may be worsened by the location of the head office of the multi-national corporation, and the concentration of specialized functions at the head office location. Multi-national corporations with established head office locations are unlikely to move them (Gray 1972), unless the existing locations cause significant inefficiencies. The task of the foreign-owned firm in the staple region may be restricted to extracting and shipping the staple as efficiently as possible. Higher order functions are not part of that mandate except as they relate to the efficient extraction of the staple. Consequently research and development capabilities related to linkage development in the staple industry may be under-developed in the staple region. The foreign-owned firms may exhibit a distinct branch-plant character (Levitt 1970; Watkins 1977b), and development of entrepreneur ship, innovation and management skills may be restricted. Even if it was economically rational to develop linkages in the staple region, the satisficing behaviour of the multi-national firms could discourage this from happening. While it might be more efficient, in an optimal sense, to investigate new suppliers or establish forward processing activities in the staple region, firms may not undertake these investigations because they are satisficers, not optimizers (March and Simon 1958). In addition, the broader corporate strategy may mitigate against linkage development. For example, diversification policies could lead to corporate research and development energies being focused on business activities unrelated to staple production. These forces may cause other countries to benefit more strongly from the demand for the staple than the staple-producing region does. 34 The impact of foreign direct investment in consumption-linked industries in Canada may also contribute to the persistence of a staple mentality. Gray (1972) and others have argued that Canadian manufacturing firms that are part of US-based multi-national corporations do not encourage development of non-staple related entrepreneurship and expertise that can effectively challenge the strength of staple sector participants when it comes to competing for scarce private and public sector revenues. Paralleling the arguments reviewed above, foreign-owned manufacturing industries may be designed to serve only the demand of the staple region, and not to compete internationally. Head office and research and development functions may be curtailed in the staple region, and entrepreneurial development severely constrained. Foreign direct investment in the staple industry may also limit development of fiscal linkages and create forces that support a staple mentality. Kierans's (1973) analysis of resource rents in Manitoba's mining industry documented how resource rents can be leaked out of an economy. Gunton and Richards (1987) argued that despite changes in resource policy in the 1970s, governments have been unsuccessful in collecting resource rents for regional capital formation. Rents have continued to be leaked to external owners or dissipated in inefficiencies in the staple sector with the result of slower growth and inhibited diversification. Politically, resource rents that are not dissipated or collected can create a battlefield on which firms, labour, and governments struggle over the distribution of the resource rents (Norrie and Percy 1982; Copithorne 1979). With respect to the persistence of a staple mentality, the failure of governments to collect resource rents creates fertile ground for optimistic expectation formation regarding future profits and wages by staple sector participants. Staples remain more attractive than other sectors because of the potential for super-profits. 35 The dependent industrialization literature that focuses on the impact of foreign direct investment on Canadian economic development contains many insights into the mechanisms by which a staple mentality might be maintained in Canadian society, including behaviour that leads to low levels of linkage development in the staple region and limited domestic entrepreneur ship. However, this literature tends to focus on how opportunities available to domestic entrepreneurs might be restricted by foreign investment. Wondering whether this was a complete answer, a number of researchers examined the characteristics of existing domestic entrepreneurship. Building on observations that Innis made many years previously, these researchers argued that domestic entrepreneurship was initially concentrated in the commercial or trade aspects of the economy and that this focus has been perpetuated by the institutional characteristics of the Canadian economy (Naylor 1975; Clement 1977). Naylor (1975) argued that indigenous entrepreneurial expertise during a critical period in Canadian history, between 1867 and 1914, was concentrated in the finance, utilities and railroad industries, all of which were focused at that time on staple production and transport. Domestic capital accumulation occurred in the staple industries and was re-invested in them, rather than in manufacturing industries. Naylor suggested Canadian banks supported this focus on staple industries by the domestic entrepreneurs. The Canadian banks, born and raised in an era of international commodity movements, were unsuited in their philosophy or experience to industrial ventures, and exhibited a distinct preference for staple-related investments. Naylor suggested the focus of indigenous entrepreneurs on the staple sector was the path of least resistance (Naylor 1975, 283). Canada's entrepreneurs continued to invest in the staple sectors because they possessed the requisite knowledge and expertise, were well acquainted with the risks, had established relationships with the state, and were lured on 36 by the potentially huge returns to be gained on their investment. These entrepreneurs developed into a very powerful group in Canadian society, and there was an enormous overexpansion in railways oriented to staple exports, which required quick staple development to maintain. This led to a vicious cycle of investment and export, and a staple trap for the Canadian economy. Naylor and others argued that the pattern established between 1867 and 1914 was perpetuated throughout the first part of the 20th century, and will continue without a dramatic alteration in Canada's oligopolistic institutional framework (Drache 1982). The implications for the nature of decision-making in the Canadian economy were clear. In short, the necessary origins of Canada as a staple-producer are perpetuated because of the nature of the capitalist class that emerges, and re-emerges, out of the staple trades... (Watkins 1977b, 88). Naylor concluded that the Canadian economy continues to have tremendous entrepreneurial ability in the commercial aspects of the economy, but little in the industrial elements (Naylor 1975, 282), thus reinforcing and perpetuating a staple mentality. A n additional insight into the forces underpinning a staple mentality in Canada is provided by research that has focused on estimating the actual contribution of natural resources to Canadian economic growth and development. A n article by Chambers and Gordon (1966) sparked an interesting debate within the staple literature in which a number of researchers challenged the argument that staple exports have produced a faster rate of growth in the economy than would have occurred if other economic sectors had received the equivalent amount of investment. Chambers and Gordon modelled the prairie wheat boom over the period 1901-1911 and attempted to measure the economic rent generated by the wheat staple. They used a counterfactual methodology in which they proposed that the labour absorbed into the prairie wheat economy between 1901 and 1911 was instead taken up by the manufacturing sector. The difference in per capita income between the actual scenario where the labour went into the wheat economy and the counterfactual 37 scenario could be taken as a measure of the economic rent generated by wheat during that time period. Using this approach, Chambers and Gordon estimated that the wheat staple contributed only 8.4% of the observed growth in per capita income between 1901 and 1911, and thus concluded that staples play a much smaller role in economic development than suggested by the staple theorists. Chambers and Gordon's (1966) analysis stimulated immediate debate. Several researchers argued that Chambers and Gordon's rent estimate was biased downwards by inappropriate assumptions (Lewis 1975; Richards 1985; Gunton and Richards 1987). While it appears that Chambers and Gordon's rent estimate was too low,^^ perhaps the most important contribution of this body of research is that it emphasized the opportunity costs of staple investment, and caused theorists and practitioners to re-consider the role of resource rents and intensive economic growth in Canadian economic development.^^ The Chambers and Gordon research and the subsequent debate suggest that by attributing aggregate economic growth to staple production, actors in the private and public sector exaggerate the economic contribution of staple production and reinforce a staple mentality. i The implications of this argument for government policy were developed by Copithorne (1979), who concluded that policies to reduce regional disparities must focus on improving productivity in non-primary sectors in depressed or declining regions. He was very critical of a continuing emphasis on staple production. 11 Chambers and Gordon's analysis was based on a small country assumption, which allowed them to assume labour could have been reallocated to the manufacturing sector without lowering wage rates in the national economy. This assumes that the demand curve for Canadian manufactures would have been infinitely elastic. Lewis (1975), Richards (1985) and Gunton and Richards (1987) have all criticized this, arguing that the international market for manufactured goods was not as large or as competitive as the one for homogeneous primary commodities like wheat. Thus, the additional supply of manufactured goods from Canada could have shifted the supply curve outward and lowered the equilibrium price. 12 Intensive economic growth is measured by growth in per capita income; extensive economic growth is measured by growth in total income or population. 38 ... we believe it is important to illustrate some of the theory and evidence that cause us to doubt the importance of natural resources in the whole regional disparities picture ... As long as the natural resources relative to population theories of regional disparities hold sway, there is an obvious danger that public policy will tend to concentrate on natural resource activity and migration to the exclusion of policies aimed at raising productivity (in the non-primary sectors). (Copithorne 1979, 6-7). This research redirected the debate over the role of resources in economic development to the generation and collection of resource rents. Many of the recent contributions in the staple tradition have focussed on issues of rent collection and management of expectations (Gunton and Richards 1987; Richards 1985; Richards and Pratt 1979). The staple thesis and related literature emphasize that there is a strong tendency for a staple mentality to develop in economies that are based on the exploitation and export of natural resources. The country's colonial origins initially focus energies on staple exploitation. The enormous infrastructure costs engendered by staple production and transport lead to high overhead costs that require rapid economic growth to service the debt; this economic growth is usually achieved by more staple production. Rapid growth leads to more imports and a consequent search for more exports. Domestic entrepreneurship and expertise becomes concentrated in the staple sector and commercially-oriented supporting industries. A n institutional framework of monopolies and oligopolies develops that is suited to this trade-oriented economy, and that tends to focus on the staple sector when looking for new investment opportunities. Foreign entrepreneurship, expertise and capital may reinforce the staple mentality through optimizing or satisficing behaviour that limits the development of linkages within the staple region. Opportunities for domestic entrepreneurs to learn by doing in new non-staple related sectors or higher-order staple-related functions may be limited because of this. 39 These forces are supported by the tendency of staple sector participants to form overly optimistic expectations regarding staple-related investment opportunities. The inability or unwillingness of governments to collect resource rents creates the perception of high returns in staple production, thus overestimating the yields from staple investments and perpetuating the staple mentality. The tendency to exaggerate the benefits of staple exploitation is supported by social-psychological characteristics of the nation's population, the generally simple methods used to form expectations, past experience with the enormous economic expansion staple exploitation has stimulated, and the characteristics of commodity markets. This section explored the mechanisms underpinning a staple mentality that are found within the economic sphere. These mechanisms may be supported or contradicted by government intervention in the economy, particularly with respect to staple production. This theme is explored in the following section under the general topic of the role of the state in a staple-based economy. 2.3 NATURAL RESOURCES AND ECONOMIC DEVELOPMENT: THE ROLE OF THE STATE The demands of staple production necessitate state involvement well beyond the constitutional framework of government, internal security and justice (Aitken 1959). The particular nature of state involvement will vary with the staple, but three general types of involvement are common: providing infrastructure for staple production, maintaining favourable terms for staple exports in international markets, and improving information for staple production. In Canada's early years, a dominant focus for state involvement was improvement in internal transportation and infrastructure systems. Later a much broader exercise of state power to support staple production evolved. However, state 40 activities have been overwhelmingly oriented to expanding staple exports rather than increasing the economic benefits captured within the domestic economy from existing staple production. This particular type of state involvement requires and reinforces a staple mentality as increasingly more state activities become oriented to facilitating staple production. During Canada's early pre-Confederation history the state played a large role in effecting internal infrastructure improvements, particularly in central Canada's transportation sector (Innis 1930, 400). The rationale underpinning these efforts was that an improved transportation route along the St. Lawrence River was fundamental to controlling the staple trade within the river's drainage basin, and to accessing the opportunities associated with the expanding frontier in Upper Canada and the American West (Creighton 1939, 13). The future growth and prosperity of the colonies was linked to the success of these transportation improvements, thus justifying state involvement (Aitken 1959). The high level of state involvement often produced financial difficulties for the state. For example, by 1831 Upper Canada had contributed 100,000 pounds (in the form of stock purchases or loans) to support the Welland Canal project linking Lake Ontario and Lake Erie. In 1834 Upper Canada authorized a further 350,000 pounds for additional improvements on the St. Lawrence Seaway (Creighton 1937). The economic slump of the mid-1830s left Upper Canada in a precarious financial position, unable to make payments on its substantial debt, a large portion of which was related to the seaway improvements. 13 Colonial states were also active in improving or protecting export markets. For example, the Maritime governments actively lobbied the British government to protect colonial fishing and maritime trade interests in a number of disputes with US-based groups. However, the enormity of the states' fiscal involvement in infrastructure improvements suggests this was perceived as the key to the future growth and prosperity of the colony (Aitken 1959). 41 Despite these early experiences, this pattern of underwriting transportation improvements was repeated in later efforts to improve the competitiveness of the St. Lawrence seaway as a trade route, and in domestic railroad construction oriented to meet the new competition from American railroads. As Creighton observed: From the first the governments of the northern provinces had accepted the view that they must open avenues for settlement and exploitation, that they must clear and prepare the way for the colonist and the capitalist. This assistance was just as necessary in the railway age as it had been in the canal period. (Creighton 1957, 277). By June 30, 1867 the Province of Canada had loaned over $20,000,000 to domestic railway companies, and $13,000,000 in interest on these loans was in arrears. However, like the St. Lawrence improvements before them, Canada's rail lines also failed to tap the trade and traffic associated with the expanding American frontier. This failure meant there were inadequate revenues to cover the fixed debt charges; the private railway companies folded and the colonial governments' financial commitments pushed them to near-bankruptcy (Aitken 1959). A t this time the colonies faced a difficult future; in the rhetoric of the day, they had to grow or die. However, their opportunities were limited. The rapid expansion in Upper Canada had resulted in settlement of all available land. Only two options offered potential salvation from the stagnation looming on the horizon, reciprocity or a new frontier. The potential for reciprocity with Britain or the U S A was rapidly evaporating. As the colonists looked across the border, they saw the enormous expansion in the U S that was fuelled by the expanding western frontier (Mackintosh 1939). In addition, ...the earlier experience with immigration and agricultural expansion in Upper Canada set the idea firmly in the collective consciousness that agricultural occupation of new territory creates enormous economic expansion and a wide range of opportunities for the profitable employment of capital, labour and entrepreneurship. (Fowke 1952, 243). 42 A gradual shift began to occur in the colonists' perceptions of what was required for the future growth and development of British North America. The old design of an international commercial empire built around the St. Lawrence was replaced with the plan of a national transcontinental economy (Creighton 1939; Aitken 1959). The colonists turned to the western frontier in Canada in the hopes it would revive investment and enlarge economic circulation within the country. This economic interest was buttressed by the growing concern about American encroachment from the south (Aitken 1959). However, access to the frontier and the economic expansion opportunities it promised was a huge problem that the private sector regarded as insurmountable. Despite increasingly generous offers from the new Dominion government during the 1870's, no private sector group came forward to build the transcontinental railway. The National Policy was designed to overcome this problem and achieve transcontinental integration. The National Policy contained three key elements; the construction of a transcontinental railway, settlement of the prairies, and institution of a tariff system on imported goods (Fowke 1952). The railway would provide access to the frontier and the settlement policies would ensure it was populated and 'developed' quickly, thus supporting the railway investment. The tariff would also support this western expansion, as the customs duties could be used to meet railroad deficits and support the debt incurred by the state in supporting this infrastructure. Thus, a significantly broader role was adopted by the state in stimulating economic growth in the country, and as agriculture was the basis of growth on the western frontier, this role was fundamentally concerned with facilitating staple production to generate economic growth. The National Policy and successive infrastructure investments by provincial governments were followed by a period of enormous economic expansion in Canada as the prairies were settled. Mackintosh (1939) argued that the most important characteristic of the period 43 between 1895 and 1920 in Canada was the high rate of investment induced by the improved expectations of profit from the exploitation of Canada's natural resources, particularly wheat. In this way, the link between staple production at the frontier and economic growth was reinforced in the minds of Canadians, and the state's role in guiding and stimulating economic growth, and in nation-building, was fully embraced by Canadian society. The Canadian state continued to play a key role in expediting staple production in the twentieth century by providing infrastructure and a supportive policy environment (Aitken 1959). Three staple industries have dominated the Canadian economy since World War II; mining, pulp and paper, and oil and gas. Cheap hydro-electric power and cheap forestry resources were key elements in the growth of the pulp and paper industry in Canada, and both of these factors were under the control of the Canadian state. ^  To make the newly discovered iron ore deposits in Quebec and Labrador competitive, improvements to the St. Lawrence seaway to facilitate the passage of large ocean-going vessels were required; in 1954 a joint agreement between Canada and the U S A to undertake these improvements was signed. To encourage exploration for oil and gas reserves in Canada during World War II, the Canadian government instituted major tax concessions for exploration companies. In other staple regions such as BC the provinces developed large resource ministries that produced resource inventories, studied market conditions and researched new technologies (Marchak 1983). Following the broadening of state involvement established with the National Policy, state efforts to facilitate staple production in the twentieth century were increasingly broad-based. Rapid economic growth has accompanied new waves of staple production in Canada, but increasingly critics have questioned whether Canadians are getting as many economic 14 In addition, the state acted to induce the migration of pulp mills to the raw material source by instituting a tariff on the export of raw pulpwood. 44 benefits as they should from staple exploitation. As suggested in the previous section, many researchers have argued that linkages are underdeveloped in Canada, and that resource rents are 'leaked' out of the economy or dissipated in inefficient behaviour. Yet the provincial and federal states did not respond to these criticisms, and devoted little effort to developing more value-added linkages within the Canadian economy. A number of explanations have been advanced for this rentier philosophy within the state, and these are briefly reviewed below. McMillan and Norrie (1980) defined a rentier society as one in which the government acts as society's agent to collect economic rents and distribute them to residents while allowing market forces to shape the economy.^ Rentier governments are risk and conflict averse, preferring to focus energies on uncontroversial policy issues and initiatives such as the machinery of government and re-election platforms (Richards and Pratt 1979). Thus, they prefer to collect some resource rents and distribute them in the form of a high level of social services rather than pursuing reforms that would increase the economic growth and development generated by existing resource industries. Should economic growth become an issue in the society, rentier governments are prone to encourage new staple production rather than attempt to derive more economic benefits from existing resource industries (Drache 1982). Given the difficult negotiations involved in maximizing domestic benefits from resource development, the tendency to focus on encouraging new resource developments is not surprising. New resource developments tend to encounter little resistance; the 'pie' becomes larger and no-one is forced to give up their existing shares. This course is significantly less conflict-ridden than one which attempts to change the distribution of the existing pie by squeezing more benefits for Canadians out of existing staple industries. Richards and Pratt (1979) suggested the characteristics of classic rentier 15 A rentier society may take a collectivist or populist form (McMillan and Norrie 1980). A collective rentier society will distribute the rents in the form of low taxes and a high level of services. In contrast, a populist rentier society will pay dividends to the residents. 45 behaviour in the resource sector are: providing favourable access, long term leases, low royalties, and guarantees of no government competition. In addition, the government may provide assurances of political stability, a sound business climate, and protection of property rights. One explanation of the persistence of a rentier philosophy within the state is that there is an ideological or cultural bias within society inimical to state intervention beyond already established roles. Arndt (1981) argued that colonial nations tended to evolve a set of attitudes that equated staple production with economic development. The imperative thus became ensuring that access to resources, which are increasingly located at the frontier, was available. Transportation was obviously a key element, and the cost of transportation became an accepted component of the national overhead cost. The government's involvement in encouraging this transportation and staple production became an accepted role for the state (Mackintosh 1939). Drache (1977) argued that this set of ideas has taken on the character of an ideology within Canada, and he called it the ideology of the 'National Dream'. Resurrected during times of economic instability and transition, this ideology suggests that looming economic difficulties can be solved by a new round of resource exploitation on the Canadian frontier, supported by Canadian government subsidies. Drache argued that the 1970s were an unstable period, and the energy mega-projects proposed at that time, such as Syncrude, James Bay and the Mackenzie Valley, resulted from the re-introduction of the National Dream ideology. This explanation of a rentier philosophy within the state rests on the argument that there is a widespread perception that resource development is equivalent to economic development, and that the role of the state is to facilitate resource development, particularly when an economic crisis appears to be looming on the horizon. These perceptions may restrict the range of opportunities considered by governments when they 46 are faced with policy issues related to staple production. Richards and Pratt (1979) suggested that ideological biases may screen potential courses of action that are open to governments and that could produce improved results when compared to the probable outcomes of a rentier approach. For example, if a government does not consider public ownership to be a viable option, this may limit the government's power in negotiations and policy development because it removes the most powerful tool available to governments. While these authors appeared to be referring to liberal versus conservative interpretations of the role of the state, their ideological argument could be extended to the restriction of the state's role in staple production to that of facilitator, not producer. A second explanation of a rentier philosophy within the state focuses on the dynamics of the policy-making process. Rather than making decisions according to the rational-comprehensive model, the governmental decision-making process is characterized by incrementalism and partisan mutual adjustment (Lindblom 1959), with the additional complicating factor of bureaucratic inertia (Richards and Pratt 1979). Within these processes, the tendency is to perpetuate the status quo, or produce outcomes that favour the most powerful interests in the process. The concentrated nature of staple industries and the enormous size of many of the multi-national corporations involved suggest that decisions may favour the interests of these firms, which are focussed on maximizing profits. Gunton and Richards (1987) argued that important insights into resource policy-making are provided by using a model of the political marketplace based on concentrated benefits and diffused costs (Olson 1982). Interest groups weigh the costs of participating in resource policy-making by comparing the money and time involved in participating to the potential gain (equal to the size of the gain times the probability of success). If the expected benefits do not exceed the costs, the interest group will tend not to participate. 47 Successful interest groups tend to define their mandates narrowly and thus be relatively small. This limits the potential for disagreement within the group and keeps costs low. A small, narrowly defined interest group also mitigates against the phenomenon of the 'free rider' where people who do not contribute to the lobbying effort may still easily claim a share of the benefits achieved through participation in policy-making. Eliminating the free rider problem increases the interest group's internal strength. If the costs of an interest group's recommended policies can be diffused over a large number of people for whom formation of a counter-lobby is prohibitively costly, the interest group's suggestions are not likely to provoke widespread opposition. Consequently, the most likely outcome of policy-making is a policy that confers benefits on a narrowly-defined interest group while spreading the costs across the general population. Gunton and Richards (1987) identify four important interest groups in resource policy-making; the citizens of the resource-owning political jurisdiction, government bureaucrats, owners and workers in resource firms, and consumers of the resource. They argued that citizens and consumers are unlikely to participate in resource policy-making because the expected benefits of doing so are so widely spread that the expected benefits per participant are lower than the costs. Thus, Gunton and Richards identify the key interest groups in resource policy-making as the government bureaucrats and the owners and workers in resource firms. Government bureaucracies are widely recognized as complex entities with their own internal dynamic. Individuals within the bureaucracies may act to achieve personal goals of power and security which may work against making any changes in existing policies, with the result that bureaucracies may end up serving the interests they were created to regulate. The owners and workers in resource firms can gain substantial and concentrated benefits from lobbying efforts; the owners from generous state concessions and the workers from increased employment and wages. The concentrated nature of most resource industries means that the free rider phenomenon is 48 not a problem. Thus, the interests and dynamics of these key interest groups creates the situation where the public interest tends to become closely associated with the private interests in the process (Gunton and Richards 1987; Nelles 1974). Using a similar model, Peter Hall attempted to address these issues when he investigated a series of Great Planning Disasters (Hall 1980). He also argued that the public planning and decision-making process involved a complex series of interactions among various groups or actors, but focused on the motivations affecting the behaviour of bureaucrats, interest groups and politicians. According to Hall's analysis, the major motivation for politicians is maximizing votes which they accomplish by remaining near the middle ground and avoiding any major changes to the status quo unless they can distribute the costs widely and the benefits narrowly and gain votes. Bureaucrats are motivated by concerns of policy and programme maintenance and thus are inherently in favour of the status quo. Only when new bureaucracies are created, usually as a result of political initiative, is there a strong dynamic of change and this is primarily oriented to enlarging the mandate, resources and power of the bureaucracy. The result is that there is a strong tendency to over-produce public goods. Finally, interest groups are focused on narrow concerns and generally constitute a minority in the population. They are chiefly concerned with getting their issue to the top of the political agenda. In the field of economic policy-making, the concentrated nature of the potential benefits to a particular group in the private sector, and their superior resources, generally lead these interest groups to be most dominant in the planning process. Hall's inclusion of the politicians as an interest group in the process is a useful enlargement of Gunton and Richard's (1987) model. A third explanation for adoption of a rentier philosophy within the state rests on a critique of government management capability. When attempts by the public sector to improve the benefits flowing to the Canadian economy from staple production have been attempted and 49 failed, explanations have tended to focus on the inexperience of the government (Rotstein 1971). Richards and Pratt (1979) suggested the state's lack of knowledge regarding a staple industry, and its inexperience in negotiation may leave it little choice but to adopt rentier behaviour. During Canada's nation-building phase, governments were primarily concerned with aggregate growth, i.e. the total increase in national income and population (Anderson 1985). Government energies were focused on promotional activities; the major efforts were concentrated in improving access to Canadian resources, ensuring that the resource development opportunities were taken up by guaranteeing a favourable business climate, and in obtaining a financial return for the public (Nelles 1974). These concerns created an abundance of government expertise in areas such as transportation and resource identification, but not in the financial and economic aspects of resource development. Consequently, in the post-WWII period when governments began to be more concerned with the growth in per capita income generated by resource development and regulating the nature of resource development (Anderson 1985; Nelles 1974), there was little expertise within government, either politically or bureaucratically, to apply to the new concerns. Based on Mathias's (1971) review of a number of cases where Canadian provincial governments had attempted to 'force growth', Rotstein suggested that provincial governments were vulnerable, if not helpless, before the magnitude and complexity of the development projects they attempted to negotiate, and before the sophisticated and experienced multi-national corporations that were involved (Rotstein 1971). In Mathias's case studies, the provincial governments had inadequate knowledge and expertise in the political and/or bureaucratic ranks to gain a clear picture of the resource industry and to weigh the arguments put forward by the multi-national corporations. The multi-nationals, in comparison, had enormous resources in the technical, financial and legal aspects of the staple industry which they brought to bear in negotiations with the inexperienced 50 governments (Rotstein 1971). This imbalance in knowledge and expertise placed the governments in a weak bargaining position and overwhelmingly favoured the multi-national corporations. The result was that 'forced growth' resulted in the promotion of uneconomic projects at public expense. Payne (1982) provided another case study supporting this argument in his analysis of efforts by a new N D P government in British Columbia to increase the province's share of the resource rents generated in the mineral sector. The N D P government attempted to institute a new royalty scheme, but the inexperience of the new government resulted in poorly designed and implemented policies. The corporate interests were able to rally other interests within the province in an effective campaign against the changes. Richards and Pratt's (1979) case studies of state intervention in Alberta and Saskatchewan's staple industries in the 1970s suggest that the government's poor bargaining position may not be maintained indefinitely. They argued that governments have a significant incentive to move up the learning curve and develop indigenous expertise in the staple industries, thus placing them in a significantly improved bargaining position. Further, Richards and Pratt suggested that a dramatic shift in perceptions and attitudes by domestic interests is possible and may form an effective source of change, pushing the state to institute aggressive reforms to increase the domestic benefits from staple production. Their case studies suggested the emergence of a provincial elite interested in economic growth and development in the provincial economy is a critical factor in changing the state's role in staple production. This elite, located in the political sphere in Alberta's case and in the bureaucratic sphere in Saskatchewan's case, was able to use the power of the state to change the rules of the game to produce more favourable results for the provincial economies. The states' actions were precipitated by federal encroachments on resource revenues, and thus were initially defensive. They became 51 aggressive as the states continued to pursue linked development and diversification based on the resource rents they collected. These case studies suggest that provincial pressure groups can be instrumental in insisting that changes be made, but that aggressive state intervention is required to overcome the significant barriers to obtaining more of the economic growth and development benefits of staple production. While the state has broadened the policy instruments and interventions used to encourage economic growth within the country, the dominant purpose of these interventions is to facilitate new staple production, rather than improve the benefits within the domestic economy from existing staple production. The persistence of a rentier philosophy within the state may be the result of ideological or political forces, inexperience with a new staple, or some combination of these three. The implications of this role and philosophy for mega-project planning processes will be described in the next section. 2.4 NATURAL RESOURCE MEGA-PROJECTS AND ECONOMIC DEVELOPMENT: SOME CHARACTERISTICS OF PUBLIC PLANNING PROCESSES In 1981 the Canadian government released its statement on Economic Development for  Canada in the 1980s (Canada 1981a), a report that catapulted natural resource mega-projects to the top of the national economic development agenda. The federal government's economic development strategy was based on three arguments. First, natural resources would be the leading sector of the Canadian economy in the future because of the shift that occurred during the 1970s in the terms of trade for resource commodities. Second, a great number of large-scale investments, mega-projects, in Canada's resource sectors were planned for the next two decades, and mega-projects would provide unique opportunities for the growth of linked industries in manufacturing and services. Third, this economic 52 development strategy would benefit all of Canada's regions at the same time because of the distribution of the planned mega-projects (Canada 1981a, 2-9). Natural resource mega-projects promised to provide a new era of economic growth and development for Canada and her regions. However, the strategy argued that the pace of the mega-project investments would have to be managed to ensure that enduring and diversified regional and national economies would be achieved. The major premise of the federal government's statement on economic development was that the leading opportunity for the Canadian economy "lies in the development of Canada's rich bounty of natural resources." (Canada 1981a, 2). Doern (1983) argued this premise was based primarily on a document prepared by the Ministry of State for Economic Development, referred to as the Medium Term Track (MTT) document.' According to Doern (1983), the central argument in the MTT document was that a fundamental and essentially permanent economic shift took place in the 1970s that strengthened Canada's traditional comparative advantage in the production of basic commodities, related manufacturing products, and high productivity, high technology manufactured goods. Commodity prices had increased dramatically in real terms relative to manufactured products in the 1970s. While the M T T document projected no further real increases in prices, it argued there would not be significant decreases either. Thus, "... the shifts in the terms of trade toward basic materials can be expected at least to be maintained in the medium term, and perhaps even to strengthen." (quoted in Doern 1983, 231). In the late 1970s, large-scale investments were planned for many resource sectors in all regions of Canada. The report of the Major Projects Task Force (Canada 1981b) presented a summary of all projects proposed for implementation by the year 2000 that involved a capital investment of more than $100 million. The estimated investment totalled $440 53 billion; 90% was targeted at energy production and distribution and hydrocarbon processing and almost half was forecast to occur in western Canada and the Territories. Based on a review of past major projects, the Task Force argued strongly that many of the potential benefits from these projects had not accrued to Canadians. To change this pattern the government would have to implement an industrial benefits strategy aimed at the planned major projects. The Task Force argued that if governments aggressively pursued the enormous industrial opportunities linked to the major projects, the potential of these projects to "... make significant long-term improvements in the industrial structure ..." of Canada's regional and national economies was enormous (Canada 1981b, 9). Certain characteristics of major projects make them particularly amenable vehicles for increasing Canadian industrial and regional benefits: 1. Major projects are identifiable, distinct entities, thus facilitating analyses which focus on concrete problems and practical solutions. 2. Major projects are of such a size and have such potential impact, both individually and in aggregate, that opportunities exist to make significant long-term improvements in the industrial structure by influencing the way in which projects are carried out. 3. Major Canadian projects proposed for implementation over the period to the year 2000 are well distributed in impact throughout many major industrial sectors. It is particularly significant that a number of these projects involve developing sources of raw materials, which in themselves provide opportunities for generating additional economic activity through further product upgrading. This, in turn, could result in closer integration between the Canadian resource and manufacturing industries. 4. The impacts of the major Canadian projects proposed for implementation over the period to the year 2000 will be distributed throughout all regions of Canada. These projects can thus provide opportunities for building stronger regions as well as a stronger country. 5. Major projects are highly visible to the public, and the key participants in project planning and execution are therefore likely to be subject to more than usual pressure to perform in ways which are in the best interests of Canada. 54 6. The nature and significance of major projects are such that government influence and / or participation are markedty higher than is the case in other industrial activities. (Canada 1981b, 9). The Task Force perceived major projects as a unique force with the potential to transform the Canadian economy. Major resource projects would be an engine of growth and change, driving a re-orientation of the Canadian manufacturing and service sectors towards activities supplying inputs to the resource industries and those that added value by upgrading the basic resource commodities. This transforming quality was further enhanced by the potential of major projects to drive economic change with apparent regional equity, always a concern in the Canadian national fabric. This theme of the regional development benefits of mega-projects was emphasized in the federal government's statement on economic development. Seldom in this century has it been possible to identify genuine prospects for growth in every region. But this is the prospect today. There are now unique opportunities for economic development in the Atlantic region and in Quebec, in Ontario and the West, and in the northern regions. (Canada 1981a, 3). Mega-projects, because of their link to natural resources and the land, apparently did not have to be coaxed to develop in peripheral regions, a characteristic of previous efforts in regional development that focused on traditional industrial incentive programs. A n additional attractive quality of natural resource mega-projects was that the government could play a key role in generating and directing their transforming potential. The Task Force on Major Projects argued that the level of government involvement would be higher than normal because of the size and significance of these projects. The Task Force also argued that to maximize the benefits to Canada's regional and national economies the governments would be required to adopt a strong interventionist role. However, the federal statement on economic development presented two rationales for 55 government involvement: 1) that the inflationary and environmental impacts of these projects would require careful assessment and control, and 2) that the potential of all projects proceeding at once or too close together temporally or spatially could mean that potential industrial benefits would not be realized because of supply-side limitations on capital, labour and entrepreneurship. Thus, government intervention would be required to manage the change that mega-projects would bring. Only a reasoned pace will permit us to marshal the enormous financial resources needed to fund this development. Only a reasoned pace will permit local indigenous manufacturing and service industries to flourish and thus build an enduring and diversified economic base. (Canada 1981a, 5). The federal government's strategy did not extend to formally implementing an industrial benefits policy, ^  but a number of institutional arrangements were suggested to increase the linkages developed in the Canadian economy such as an Office of Industrial and Regional Benefits (Doern 1983). Doern (1983) argued that, with the federal government's 1981 statement, mega-projects slipped to the forefront of Canadian economic development, a place that they really had no right to be. The total projected investment, while very large, represented less than 10% of the total investment in the Canadian economy during the period, and none of the background reports leading up to the 1981 statement, except the report of the Major Projects Task Force, had specifically emphasized mega-projects as the central element of the nation's economic development strategy. 16 In practice however, the national government and several provincial governments did negotiate industrial benefits in return for government funding or subsidies during the mid 1980s. 17 Doern (1983) suggested that mega-projects simply happened to 'fit the bill ' at the time, meeting, in the mind of key senior politicians, a number of the government's priorities, including a strong desire to raise the federal government's visibility, and a driving concern to address the issue of energy policy and particularly concerns about security of energy supply. In addition, Doern (1983) argued that the mega-project emphasis diffused the ongoing debate about an appropriate industrial strategy for Canada, a debate the federal government was unwilling to pursue in a climate of economic uncertainty and political malaise. 56 The emphasis on mega-projects by the federal government led to high expectations and when several projects failed or were shelved in early 1980s, the response from the opposition parties overemphasized the failure (Doern 1983). The suggestion that mega-projects were gone, never to appear again, was, however, unwarranted. Large-scale undertakings have a long history in Canada. From the St. Lawrence seaway improvements and numerous railway projects including the enormous Grand Trunk and Canadian Pacific undertakings in the mid-1800s, through to the construction of the Churchill Falls Dam, the W A C Bennett Dam and James Bay I hydroelectric complex in the mid-1900s, Canadians have contemplated and undertaken large-scale projects. There are several reasons for the persistence of natural resource mega-projects.v Mega-projects, particularly when they are located in frontier regions, have a particular symbolic meaning that is very appealing to Canadians. Perhaps they are part of our national psyche, as suggested in an editorial on the second phase of the enormous James Bay hydroelectric mega-project; "As the decade ends, we may again experience the luxury of considering the risks of opportunity on a large scale - Canada as we prefer to know it." (Globe and Mai l , 15/3/88, A6). Further, the idea of a mega-project, once developed, is very persistent. Large-scale projects that are shelved resurface over time, with their private or public sector proponents putting the mega-project forward and 'testing the water' perhaps several times before conditions gel (Bryant 1982). Currently, many of the mega-projects on the drawing boards in the early 1980s are back in the spotlight. In Alberta, the OSLO and Syncrude developments are in the public eye, as is Hibernia in Newfoundland and the second phase of the James Bay hydroelectric development in Quebec. Thus, as Doern (1983) suggested, it is important that we learn more about the nature of these projects in a number of dimensions. 57 The Task Force on Major Projects defined a major project as one involving a capital investment of $100 million or more. The Task Force compiled a list of 325 major projects, 90 of which were projected to have capital costs exceeding $1 billion. For the purposes of this research, these are the mega-projects; they are an order-of-magnitude larger than a major project. This definition is in keeping with the common use of the term in the latest round of public attention lavished on these initiatives. The mega-projects in the spotlight most recently have all required investments of $1 billion or more. In addition, the mega-projects have often involved the combination of several major projects, and consequently a large number of proponents and the public sector. A brief description of several of these mega-projects is useful background against which to place a list of their major characteristics. Beginning in the west, the North East Coal Project was developed in northeastern BC at an estimated capital cost of $2 billion (1983$C). This mega-project involved construction of two metallurgical coal mines, a new town and access roads, a new rail line, and a new port, along with upgrading of existing rail lines. Two mining companies, three crown corporations and various provincial and federal government departments were involved in planning and constructing the mega-project; the planning analysis and evaluation phase lasted 5 years, and construction took approximately 2.5 years. Annual coal output from the two mines was expected to be 7.7 M M T P Y , with additional tonnages as more mines were developed in the area. In Alberta, the OSLO mega-project and the Syncrude expansion, both located in northeastern Alberta, each have projected investments of $4 billion (1988$C). These are both petroleum-based mega-projects, using advanced technology to extract light crude oil from Alberta's immense tarsands. The OSLO mega-project involves a consortium of five oil companies and the Alberta government; Syncrude is owned by eight companies. The 58 construction phase for the OSLO mega-project is expected to last 5 years, for Syncrude the estimate is 8 years. Oil production from OSLO is expected to be 72,000 barrels per day; yield from the Syncrude expansion would be 75,000 barrels per day. Together they would boost Alberta's crude oil production by about 10%. In Saskatchewan, the heavy oil upgrader proposed for Lloydminster is another mega-project in the petroleum industry designed to use advanced technology to produce light crude from petroleum-containing formations. Originally a larger project with capital costs of $3.2 billion, the project was eventually scaled down to a capital investment of $1.3 billion. Only one oil company, Husky Oil, is involved in the mega-project, although it has approached other companies with the idea of bringing in new partners. Husky Oil was unsuccessful in 1988 in their attempt to get more private sector investors and so the company approached the Canadian government as a potential investor. The mega-project is expected to have a construction period of 3 years, and to produce 46,000 barrels per day of light crude oil. In Manitoba, construction began on the Limestone hydroelectric mega-project in 1985. Estimated to cost approximately $2 billion by the time it is completed in 1990, the dam is located on the Nelson River in the northeastern region of the province, 600 kilometres upstream from Hudson Bay. Limestone will produce 1,280 Megawatts of power when completed and will increase electricity production in Manitoba by 25%. Manitoba Hydro, the crown corporation responsible for hydroelectric power in the province, has negotiated power sales contracts with US buyers expected to generate revenues of $4.3 billion over 16 years. Plans are currently underway for another major dam on the Nelson River, the Conawapa project, with an estimated cost of $3.2 billion. 59 In Quebec, Premier Robert Bourassa announced that the second phase of James Bay hydroelectric development would begin in 1989. Estimated to cost $7.5 billion, the construction of this hydroelectric complex will take 7 years to complete and will produce 2,500 Megawatts of power. Located in the LaGrande region in northwestern Quebec, the project involves a number of river diversions and construction of 3 dams, in addition to new transmission facilities. Most of the power will be sold to the U S A . On the east coast, the Hibernia off-shore oil development is a prominent mega-project. Expected to involve capital investment exceeding $5 billion, the oil field is located 300 kilometres east of St. John's in Newfoundland and has the potential to produce 110,000 barrels of oil per day. A private sector consortium of five companies are involved in the mega-project, and the Newfoundland and Canadian governments have been deeply involved in negotiations with the consortium over a number of issues, including industrial benefits in Newfoundland. This brief review, summarized in Table 2.1, suggests a number of common mega-project characteristics. One of the most striking aspects of these mega-projects is their magnitude, in terms of investment, employment and output. A l l of the mega-projects listed in Table 2.1 involve investment of more that $1 billion, but many are closer to $4 or $5 billion. Related to their immensity, the employment generated is enormous particularly during the construction phase. Thus the short-term economic benefits promised by mega-projects are huge. This is especially true for the hydroelectric mega-projects. Also, most of the projects will increase the provincial output in their particular resource sector by 25%. In 1986, the two mines in the N E C P produced approximately 35% of all the metallurgical coal produced in BC. The Limestone project will increase electricity production in Manitoba by 25% when it is completed. The Syncrude expansion and OSLO development will increase Alberta's supply of synthetic oil by 25%, and currently one-half TABLE 2.1 SELECTED CHARACTERISTICS OF SOME NATURAL RESOURCE MEGA-PROJECTS IN CANADA Megaprojcct Location Estimated Capital Cosl(l988$C) Direct Employment Construction Operation Output Operating Lifespan Construction Period NORTH EAST COAL Northeastern S2.5 billion 2700 1850 6.4 MMTPY 20+ yrs. 3 yrs. Coal Mines BC pcrson-yrs. jobs 1981-1984 LIMESTONE Nelson River, $1.7 billion 6000 NA 1280 MW 20+yrs. 5 yrs. Hydroelectric NE Manitoba jobs 1985-1990 JAMES BAY II LaGrande Region, $7.7 billion 40000 NA 2500 MW 20+ yrs. 7 yrs. Hydroelectric NW Quebec jobs 1989-1995 SYNCRUDE EXPANSION Fori McMurray, $4 billion 7000 1400 75000 b/d NA 8 yrs. Synthetic Oil Alberta jobs jobs 1989-1996 OSLO Kearl Region, $4 billion 7000 6270 72000 b/d 35 yrs. 5 yrs. Synthetic Oil Northern Alberta jobs jobs 1991-1996 HEAVY OIL UPGRADER Lloydminster, $1.3 billion 4300 NA 46000 b/d NA 3 yrs. Synthetic Oil Sask. jobs 1989-1992 H1BERNIA Offshore $5.2 billion 1400 1100 110000 b/d 20 yrs. 6 yrs. Offshore Oil Newfoundland jobs jobs 1989-1995 MMTPY = Million Metric Tonnes Per Year MW = MegaWatts b/d = barrels per day 61 of Alberta's total oil supply is from synthetic production. In addition, the projects are physically large; they involve very large land areas and often very large structures. For example, part of the Syncrude expansion required a new module to increase the processing capacity of the plant. The module, built in Edmonton, weighed 204 tonnes and was 9 meters wide by 21 meters long by 9 meters high. Four trucks were required to haul the module to Fort McMurray from Edmonton and the highway had to be closed for a day. Mega-projects also tend to be discrete undertakings compared to policy or programme initiatives. Doern and Toner (1985) suggested that, because so much attention is directed towards the planning and construction phases of mega-projects, they tend to have a distinct beginning and end. This discreteness, combined with their magnitude, means that mega-projects have high public visibility. Public and private sector participants in a mega-project may experience visible success, and this success may bring far-reaching positive impacts. For example, the private sector participants may develop and strengthen their reputations for successfully negotiating complex agreements and organizing and completing complex tasks. Politicians may develop a reputation for bringing large investments to particular regions, enhancing their prospects for re-election. The desire to achieve this success, or the unwillingness to experience failure, may drive the participants to continue with the planning phase despite serious obstacles. This can be further complicated by the empire-building tendencies of public or private sector bureaucracies (Downs 1966; Niskanen 1973; Breton 1974). Information may be distorted to promote projects that provide organizations with prestige. Another implication of the large, discrete quality of mega-projects is that public and private sector participants may be subject to more pressure to ensure that the mega-18 The discreye aspect of mega-projects also allows the public and private sector participants to suffer conspicuous failure. 62 project contributes to the public interest than would be the case with a smaller project (Canada 1981b). The high visibility level makes them targets for criticism, and they may be perceived as opportunities to introduce new procedures or to negotiate different arrangements than would be the case for smaller projects. These perceptions may be strengthened if the level of government involvement in the mega-project is high. Another important characteristic is the capital-intensity of these mega-projects, which makes them very sensitive to financing and capital market conditions (Doern and Toner 1985). This sensitivity encourages all parties to deflect as much risk as possible to other participants. Thus, complex negotiations in the financing of these projects are commonplace, and there is a tendency to increase the number of participants to spread the risk. Natural resource mega-projects are very complex undertakings. Many of these projects involve numerous actors from the public and private sector, and the composition can change substantially during the planning process. The public sector may be involved by providing grants, loan guarantees, or transportation infrastructure, or by becoming a partner in the project. In addition, the public sector is often involved in the planning processes for the mega-projects through its project analysis and environmental assessment processes. Further complicating the situation, the private sector participants are often a consortium of firms with numerous sub-contracted participants. The composition of the consortium may change substantially during the planning process as the participating firms may be in substantially different fiscal positions and have different risk tolerances (Doern and Toner 1985). This increases the uncertainty surrounding the mega-project. Doern and Toner (1985) argued that mega-projects have a higher probability than a normal project of triggering concerns in a large number of related policy fields. This 63 increases the number of government departments involved in the planning and assessment procedures, and may lead to the creation of special planning processes for mega-projects. This tendency to create ad hoc planning processes is amplified by the unique nature of mega-projects; different packages of policy instruments to suit the particular characteristics and components of each mega-project are often required. Responding to the uniqueness outside 'normal' planning processes places extraordinary pressures on public sector departments, and often calls discretionary powers into play. The magnitude, capital-intensity, complexity and visibility characteristics all make mega-projects risky undertakings in a shifting political and economic environment. Mega-projects have long lead times and long operational periods, during which time economic circumstances may change, particularly given the cyclical nature of commodity markets. In addition, mega-projects often involve application of new technologies, with which the companies may not have any previous experience. The projects are often located in wilderness areas or regions that are sparsely settled; they may involve fundamental environmental changes, the consequences of which cannot be predicted. ^  Finally, most of the recent mega-projects are oriented to supplying the U S A with energy and are based on a fundamental assumption of increasing growth and demand for energy in that country. While selling into a single national market raises the issue of potential trade barriers in the future, a more important long-term concern may be the supply-side focus of a national mega-project strategy. A very important additional characteristic of mega-projects is their symbolic meaning, comprised of technological and emotional elements. Rooted partially in the technological age which places a high value on the ability of humans to shape nature to meet their 19 For example, both Quebec and Manitoba are installing hydro-electric mega-projects on river systems that are major tributaries to Hudson Bay. The cumulative effect of these installations on the ecological environment is unknown. 64 needs, mega-projects may represent the ultimate achievement for some. Canadians may have a stronger affinity for this value than other nationalities; our geography and sparse settlement present many challenges to anyone wishing to live outside an urban centre, and to people wanting to develop the potential of the land. A n editorial in Northern Perspectives