The high costs of doing business on first nation lands in Canada.

Author:Richard, Gregory

    Canadians often voice disappointment with the results of government spending aimed at improving the economic fortunes of First Nation persons. They see billions of dollars spent each year which seems to result in very little difference in peoples' well being. There is a familiar litany of unchanging circumstances: joblessness; low business presence; low life expectancy; low average incomes; substandard housing, services and infrastructure; and above all else, a pervasive sense of hopelessness (Armstrong, 2001, Statistics Canada, 2006, and The Assembly of First Nations, 2008). The question that is often asked is where does this money go? The failure to improve the economic circumstances of even the most favorably located First Nation lands is puzzling to policy makers and neoclassical economists as well. In theory, lower land costs and wages coupled with government assistance should cause investment to flow towards well sited First Nation lands (McMillan, 2002, and Backhouse, 2002). Yet this is clearly not happening. In many cases a First Nation is demonstrating all the symptoms of economic depression and yet it is only separated from a region with strong economic growth by a road, a creek or an arbitrary administration boundary (Anderson and Parker, 2006, Huffman and Miller, 2006).

    This paper explores the hypothesis that the fundamental source of under development of First Nation economies in Canada is not universally a result of poor location or lack of resources as is commonly surmised. Instead, it is a market failure that occurs on even the best sited First Nation lands in Canada caused by high transaction costs associated with investment (Cootler and Ulen, 2000, Weisner, 1998, and Hobbs, 2004). In short, the institutional framework that supports all the components of a typical investment in a land improvement elsewhere in Canada are absent on First Nation lands. This would include obtaining clearly specified and enforceable property rights, information acquisition related to the site, contractual stipulations addressing the provision of services and infrastructure, identifying heritage and environmental issues, and obtaining insurance and financing to list just a few. The informal/formal rules governing markets and the public infrastructure to support trade is what makes markets work or fail. Where these rules are absent, transaction costs are high (Coase, 1960, and Allen, 1988).

    This paper presents evidence that transaction costs related to investment on First Nation lands in Canada are high and that this is the most fundamental cause of their under development. It further suggests that the origin of this problem lies in a lack of market oriented governance institutions. Markets need governments. The role of governments in making markets work is to develop a legal and administrative framework that protects property rights, ensures quality, provides standards, currency, reliable information and security for buyers and sellers and builds the public infrastructure necessary to facilitate trade (Commons, 1959, North, 1993, Williamson, 1985, and Rosenberg and Birdzell 1986).


    This paper is based on completed projects on First Nation lands in the 1990s. Some of the content of this paper is based on a report titled Expanding Commercial Activities on First Nation Lands, completed for the Indian Taxation Advisory Board and the Department of Indian Affairs. Data was taken from case studies of completed residential and/or commercial projects to evaluate the costs associated with the regulatory and consultative processes in First Nation land development. Because of the difficulties and confidentiality issues raised in determining professional fees and hours associated with specific projects, the time spent in completing each component of a land development deal is used as a proxy for professional costs. Time is also used to estimate the opportunity costs associated with project delays. A similar case study approach for measuring transaction costs is common in the literature. (DeSoto, 2000, Lorentz, 2007, Bartezzaghi, 2003, and Wagner, 2002).

    There are no industry standards for the costs associated with the various components of land development. In general, assuming community interests and regulatory safeguards are met, the shorter the time frame for finishing each component of a land deal, the lower the costs and the greater the net benefit produced. Also, in general the shorter the time to proceed from concept to construction the lower the opportunity costs and the greater the net benefit.

    To provide benchmarking, comparisons will be made to off-reserve land developments. Three First Nation case studies were selected.

    * Real Canadian Superstore at Seymour Creek I.R. No. 2, a Squamish Nation reserve in North Vancouver, British Columbia.

    * Sun Rivers golf course and residential development at Kamloops I.R. No. 1, a Kamloops Indian Band reserve in Kamloops, British Columbia.

    * Mixed use development (commercial/office) at Siksika I.R. No. 146, a Siksika Nation reserve near Calgary, Alberta.

    People involved in all aspects of these deals were interviewed. People representing both sides of the deal were also interviewed. These case studies are not typical First Nation communities in Canada but presented a good opportunity to disprove the theory that the costs of doing business on reserve are high. The First Nations discussed in the case studies have favorably located reserves and a history of active management of their land and resources. All have developed additional capacity and sophistication in terms of the administration from their experience with all aspects of major commercial and/or residential developments. All of the projects have been completed.

    Some other similar characteristics include.

    * All were located on First Nation lands and required a designation.

    * All required infrastructure to be upgraded.

    * In three cases, the developer had a proven track record off-reserve and significant financial capacity.

    * In all cases there was little doubt that if completed, the project would be economically viable.

    Despite the success of the projects, evidence emerged suggesting the deals were difficult to put together. This included.

    * A reluctance by the Crown to take risk. This protracted negotiations and increased the time to completion.

    * A requirement in some cases that cash flows from other projects be used to guarantee financing for infrastructure improvements.

    * A desire by the adjacent local authority to exert control over the reserve development through the application of their by-laws.

    * A lack of...

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