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How deregulation hits rural communities

Buckle up, my friends, today's topic: why deregulation isn't the answer for stimulating growth in rural B.C., much as free market leaning individuals tend to embrace it when times get tough. And times are getting tough.

Buckle up, my friends, today's topic: why deregulation isn't the answer for stimulating growth in rural B.C., much as free market leaning individuals tend to embrace it when times get tough.

And times are getting tough.

If you think giving businesses a longer leash - or eliminating the leash altogether - will help, consider a recent article by urbanist Richard Florida who pointed out that the U.S. Airline Deregulation Act (ADA) of 1978 "tilted the playing field toward larger cities and metropolitan areas."

Essentially, the act stripped the requirement that airlines fly to small and medium-sized cities.

In the U.S., like Canada, airports have increasingly become critical components of economic development in both rural and urban areas - and a straight line can be drawn between their growth, population increases and local diversification.

Once the industry was deregulated, airline companies did exactly what should have been expected of them - they pursued profit.

The greatest growth opportunities were in large population centres, which resulted in more flights to and from major cities and fewer flights to smaller centres. It's a classic "rich get richer, poor get poorer" story.

The airline example is just one and, of course, there are myriad reasons why small cities and rural areas have suffered in recent decades.

Much of the conversation regarding rural decline tends to focus our attention on globalization, exchange rates, commodity prices and technology as our collective bogeymen, overlooking sometimes-elusive public policy instruments that have long-lasting effects and are difficult if not impossible to reverse.

Deregulation in Canada over the past 40 years has, in many ways, mirrored similar experiments in the U.S. and significantly altered the way our telecommunications, transportation, agriculture, forestry and other sectors operate - sometimes for the better, sometimes not.

Between 1975 and 1996, a total of 208 interventions were made to deregulate Canadian industries as the federal government, influenced by the Competition Bureau, increasingly highlighted the costs of regulation and benefits of open markets, according to a paper on regulatory reform published in the Review of Industrial Organization in 1998.

This shift resulted in drastic changes in everything from the level of rail passenger service Canadians could expect, to access to cheaper airfares and airline routes, availability of freight movements by truck and, of course, the amount of CanCon we suffer through on our local radio stations.

Most of the deregulation occurred in the telecommunications and transportation sectors, yet precious little research has been done in Canada that studies the impact of this shift on the provincial and territorial norths.

Not so in the U.S.

In the fall of 1987, U.S. lawyer and researcher Paul Dempsey highlighted in the Administrative Law Review the 'dark side of deregulation and its impact on small communities' - paying attention to the air, rail and bus deregulation in the U.S.

In 1929, 20,000 passenger trains provided daily intercity service in the U.S. - by 1970, thanks in part to deregulation, only 360 intercity trains were left, according to Dempsey.

The lines that remained in operation by 1987 were largely to and from major cities.

Many rural areas were completely abandoned.

Back to airlines - by 1984, six years after the introduction of the ADA, "225 airports had suffered more than a 50 per cent decline in seats, including some 119 airports that lost service completely."

It's a similar story with buses. In looking at the U.S. Bus Regulatory Reform Act of 1982, which axed the requirement for bus companies to service specific routes and gave them the power to increase fares, Dempsey found that by 1986 "4,514 communities had lost bus service, while only 896 gained it."

He also found that 3,432 of the towns that lost service in that four-year period had a population of 10,000 or less, showing the disproportionate impact on rural areas.

Dempsey's research was published in 1987 - now fast forward to 2019, 40 years after the first major deregulation reforms took place in Canada, and ask yourself: how good do you feel about intercity bus service in rural B.C.? How about flight schedules and costs? Ferry routes and availability?

I thought so.

The thing is, as one source pointed out to me, deregulation - or regulation - are blunt force instruments often driven by ideology.

Care and attention are required when using them to avoid the mistakes of the past.

For that, let's dissect an example at home here in B.C. - appurtenancy in the forest sector.

Unless you've lived in a forestry town or worked in the industry, you've probably never heard of that term.

Appurtenancy is one of those obscure policy tools you're not likely to come across - yet one that's still groused about in places like Mackenzie, Fort St. James and Quesnel.

Appurtenancy was the policy tool that linked harvesting areas to community benefit - essentially, the trees that were cut in an area had to be milled in that area.

The idea was to use public policy to incentivize local community sustainability and development - it was particularly championed by the government of W.A.C. Bennett in the years following the Second World War.

But riding the wave of deregulation through the 80s and 90s, appurtenancy was mostly phased out by 2002 - with only 11.5 per cent of B.C.'s harvest subject to it.

A year later, the then-Liberal government axed it as part of its forestry revitalization plan, responding to industry concerns that existing rules made the industry uncompetitive and, if not removed, more mills would close.

In addition to removing appurtenancy, the government also removed the requirement that forestry companies pay penalties to transport logs to mills beyond the areas the logs were harvested in.

These critical changes, not dissimilar to what happened with U.S. airlines following ADA, changed the way B.C.'s forest sector operated.

Unlike the U.S. experience with deregulation in the transportation sector, we didn't see mass consolidations in our forestry sector until 2019. Why?

I'll come back to that in a moment.

First, was appurtenancy effective in the first place?

As Rob van Adrichem points out in Knowledge Appurtenancy: Universities, Regional Development and the Knowledge-Based Economy, the policy worked well in the initial decades after the Second World War when there was a perception that we had an endless supply of trees and demand was high for forest products.

By the 1980s, as mills implemented new technologies, employment declined relative to productivity and our industry was being challenged by competitors in other countries.

Van Adrichem points out that despite appurtenancy's intentions, at least 30 mills closed while the legislation was in place.

Worse, what was intended - that a well-regulated primary industry would provide security and lead to the development of secondary and tertiary industries and, ultimately, a sustainable community - didn't happen as intended.

In fact, our experience in B.C. means we are stuck even deeper in the Staples Trap, providing the local population with wealth from primary sectors, but entirely too much comfort to recognize the urgent need for diversification.

Writes van Adrichem: "Like a gambler waiting for his/her next big win, employees and communities would endure periods of bust in anticipation of the return of boom times, which would inevitably come."

And they have, and so have the busts.

In the eight years I've been in Northern B.C., I've seen economic busts in a dozen towns - and booms as well.

Interestingly, the busts appear to serve as better incentives to diversify than the booms.

So, if the blunt force of deregulation tends to cause industry consolidation in rural areas, why was it delayed in rural B.C. since appurtenancy was cut in 2003?

The answer, in part, lies with an insect.

The mountain pine beetle epidemic set off a period of forestry sector stimulus that helped offset the consolidation of mills that likely would have occurred sooner without it.

Significantly increased harvest levels to get rid of the dead pine, rock bottom stumpage fees, and the ability for industry to choose where to harvest and where to mill without penalty, helped keep things afloat (not to mention a booming U.S. housing market pre-2008).

Additionally, public policy such as wood-first building initiatives, a green agenda that incentivized biomass power development, the creation of a wood pellet industry and energy upgrade projects improved utilization of both the harvest and mill residuals and created new revenue streams.

Between 2003 and 2018, these policy tools, among other things, delayed the worst of the consolidation - yet sooner or later we'd run out of the dead wood that was relatively inexpensive to access and the cut levels would come down.

Enter 2019 and a prevailing narrative in the industry is that the cumulative impacts of the market and public policy decisions we've made over the past 40 years, appurtenancy included, have come home to roost.

Industry does need flexibility to consolidate and ensure the most efficient operations survive - reintroducing appurtenancy now would be a disaster for the interior forestry sector.

Yet, shades of regulation that ties resources to origin points - once even championed by a right-leaning Socred government in the 50s and 60s - have showed signs of revitalization under an NDP government.

Bill 22 has given the province the ability to veto the transfer of timber-cutting rights between companies.

The province recently used its veto to ensure that Hampton Forest Products committed to build a new mill in Fort St. James within three years, following its purchase of Conifex Timber's sawmill and forest license in the area - sending the message that the timber harvested in an area should again be processed there.

Two weeks later, the province issued a news release regarding the Quesnel Timber Supply Area, highlighting new apportionment rules within the harvest that guarantees more community and Indigenous control over how the timber is harvested and managed.

As a casual observer of political history in B.C., I find it interesting to see an NDP government embrace a philosophy once championed by the Socreds, but that's a column for another day.

On the topic of deregulation and its impact in rural communities - the advice is this: be careful, very careful.

And don't let ideology win over otherwise sound public sector practices - once the cat's out of the bag, as it were, good luck getting it back in.

Deregulation is typically championed by the private sector to solve its competition issues, and government responds in kind to protect the industries that form the basis of the economy and generate significant tax revenue.

But, as we've seen in rural areas, it can result in significant consolidation and job loss in resource-based communities and lead to a situation where the primary purpose of those industries ceases to be about community sustainability and instead is largely about profit-making and tax revenue for senior levels of government.

The problem is, as experience with the transportation sector in the U.S. illustrates, while ideology might not have the best interests of rural communities at heart, neither does unregulated industry.

So here's my question (and this is coming from someone who supports industry), to what extent do we want to host industries that generate diminishing returns for rural B.C.?

-- Joel McKay is the chief executive office of the Northern Development Initiative Trust.