The Economics of Corporate Growth in a First Nation Community

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CAPE BRETON UNIVERSITY

The Economics of

Corporate Growth in aFirst Nation

CommunityA Case Study of Membertou First Nation

Roger Mellen

12/17/2009



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The Economics of Corporate Growth in a First Nation Community:

A Case Study of the Membertou First Nation.

Introduction

Membertou is a First Nation community located in Cape Breton, Nova

Scotia with an estimated registered population of 1,212 (INAC – October 2009)

and was named after Grand Chief Membertou (1510-1611). Formally known as

the Kings Road Reserve, the community of 125 people was moved from the coast

of the Sydney Harbor to its present location, three-kilometers from the City of

Sydney, in 1916-1926 by the Exchequer Court of Canada. Membertou is one of

the very few aboriginal communities in the Atlantic Provinces that is located near

a highly populated city or town. The Membertou Band Council is also one of the

first aboriginal governed institutions that has achieved the global ISO-9000

certification, which has helped label Membertou as a potential international

business operator. However, the aboriginal community had previously suffered

from budget deficits and with the only source of money from Indian and Northern

Affairs Canada the community took it upon themselves in 1994/95 to retire out of

debt and concentrate on economic development. In 2002/03 Membertou emerged

with a budget surplus of $21 million with only one-third contributed from Indian

and Northern Affairs Canada.



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Current Situation

In this section I will analyze Membertou’s current economic environment

to help evaluate whether it makes good public policy to construct a new hockey

arena as well as other business expansions. Membertou currently has fourteen

revenue generating businesses and nine other facilities supporting administration,

heritage, policing, health, and education. However, as we speak the construction

of an incubator mall is taking place at a cost of $3.5 million which is expected to

open in April of 2010 along with the potential development of a five-class 130-

room hotel owned by Hilton Worldwide, which is expected to cost Membertou an

additional $15 million and expected to be fully operational by April 2011.

Finally, Membertou is arranging land behind the current Membertou

Entertainment Centre for the development of a recreational facility that will hold a

rink, gym, and swimming pools; the decision to build this arena will be the

ultimate focus of this paper. Conversely, how does Membertou justify the

significant impact that these corporations have on the community and do they

really improve the social welfare of the individuals of the community or as a

whole?

With the implementation of the Membertou Gaming Commission

community members of Membertou now receive annual “dividend” checks,

except for those who are under the age of 19 whose funds are held in a trust fund

until coming of age with added interest. According to Statistics Canada,

Membertou’s population of people over the age of 19 is 56% and with a



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population count of 1,212 in October of 2009 one could estimate that this annual

dividend cost about $1,018,080 (with a grand total of $1,818,000 including

minority funds held in trust) in benefits for November 2009.

On average Membertou receives $7,151,747 from Indian and Northern

Affairs Canada in the form of transfer payments which equates on average of

$5,901 per person per annum through the federal funding program. An interesting

notional value is the cumulative amount that the aboriginal reserve would receive

if it were to receive an amount equivalent to its population multiplied by the basic

social assistance benefit amount. With an average social welfare allowance of

$185 bi-weekly and a population of 1,212 this would equate to $5,829,720.

Henceforth, does this indicate that the Government of Canada intends that on

average 75% of Indian and Northern Affairs Canada funding is intended to benefit

community members through health, education, and infrastructure; we don’t

know the true intentions of the stipulations for the federal transfer payments.

Henceforth, one could assume through the evaluation of Membertou’s growth that

it may have not been enough to economically simulate their small economy.

One could ask the question of whether or not this money (transfer

payments) was provided with the intention of building a massive enterprise of

non-taxable band owned entities; however, has Membertou built its operations at

the expense of the community members social benefit proceeds? While we will

never know the answer to this question we can assume that there would not be a



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Corporate Division based in Halifax, Nova Scotia if it was not for the fact that the

government of Canada provides the band council monies in the form of transfer

payments.

In 2006 Canada Statistics indicated a participation rate of 65.3%,

employment rate of 48.0%, and an unemployment rate of 26.6% for Membertou

First Nation; meanwhile, Nova Scotia’s rates for 2006 were 62.9%, 57.2%, and

9.1%, respectively. It is quite obvious that Membertou still suffers from high

unemployment compared to the provinces overall average. Quite worthy of

noting is that Membertou has one of the smallest land base per capita in Canada

with an average of 3 acres per person compared to everywhere else in Canada

with an average of 12-15 acres per capita. It becomes quite evident that

Membertou has achieved substantial growth with limited amount of natural land

resources; however, will this corporate growth one day take away land that the

community may need one day for residential expansion?

Although many have claimed that Membertou’s success would have not

been achieved without the leadership of certain individuals, it is quite evident that

its urbanized location and tax exemption status has more than likely been the most

relevant factors effecting the growth and success of Membertou’s business

projects. Several community and social benefits of a first nation community

being located near urbanized areas include reduced reliance on government

funding, increase in the standard of living, enhance political and cultural



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development, and greater accessibility to post-secondary education. With Cape

Breton University and the Nova Scotia Community College being located in the

same regional jurisdiction as Membertou First Nation we have seen a dramatic

increase in the amount of Aboriginal Canadians attending post-secondary schools

which is directly related to a substantial improvement in the standard of living and

quality of lifestyle. Furthermore, Harvey Johnstone of the Shannon School of

Business at Cape Breton University identified three critical events that has helped

Membertou shape its progression towards self – sufficiency; 1) the team, which

provided political stability; 2) the treaty rights, which removed barriers for

operating a gaming commission and exercising fishing rights; and 3) the

International Organization for Standardization certificate which has helped ensure

transparency, accountability, and openness.

Upon reviewing Membertou’s expenditures on education we have seen

that education spending has increased as business ventures expanded. In 2001

Membertou only spent $1,658,401 on education and in the 2009 fiscal period

(Membertou’s fiscal period runs from April to March per annum) Membertou

spent $4,243,999. This represents a growth rate of 156-percent in only eight-

years. This is a significant number when Membertou only received $5,497,223 in

2009 fiscal period from Indian and Northern Affairs Canada, a difference of

nearly $1.3 million. After analyzing the correlation between annual asset nominal

amounts and annual expenditures on education we have determined a linear

correlation coefficient of 0.9650 and a coefficient of determination of 0.9312.



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While the growth of assets best represents the cumulative investments added to

Membertou’s portfolio we have seen that there does exist a strong relationship

between Membertou’s growth and the amount of community members returning

to post-secondary education; however, we would not view the same results if we

compared overall government funding with annual education expenditures. Does

this indicate that the government does not attempt to encourage aboriginals to

receive university or community college training?

No, according the Federal Framework for Aboriginal Economic

Development (FFAED) published by the Government of Canada in 2009, the first

priority between government and first nation’s relationships is to improve

economic development. Since 2001 to 2006 the cumulative effect on GDP of the

increasing Aboriginal education and labour market outcomes is estimated at $401

billion. With the exponential growth of Aboriginal Canadians there exist trends

that Aboriginal Canadians will become full participants in the Canadian economy

as entrepreneurs, employers, and employees. With the median age of 26.5 years

old Aboriginal Canadians prove to be the fastest growing population in Canada,

growing four times faster than the rest of Canada’s population. Therefore, it has

been observed that Canadian companies see increasing recognition for employing

Aboriginal Canadians and partnering with Aboriginal communities, which may

turn out to be smart business strategies. As it is expected by the Canadian

government that within the next ten years nearly 400,000 Aboriginal Canadians

will be entering the labour market this may represents a significant opportunity to



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help meet Canada’s long-term demand for workers. While aboriginal

communities still suffer from lack of education, unemployment, and income

inequalities we understand that the path to independence is on economic

development. Finally, the strategic priorities of the federal government in regards

to the new Federal Framework for Aboriginal Economic Development is based on

strengthening aboriginal entrepreneurship, developing aboriginal human capital,

enhancing the value of aboriginal assets, and forging new and effective

partnerships.

Project Analysis

Assume that the project of building the new recreational facility is

expected to cost an initial investment of $6,000,000. We have found out through

Membertou’s Annual Chief and Council Report that the most current borrowing

rate has been the prime rate plus 1.5% through the Royal Bank of Canada.

However, for our sensitivity analysis we have compared various potential net

profits (estimated net revenues less net expenses) with various discount rates, 5%,

10%, and 15%, respectively. If the project was to be undertaken with a discount

rate of 5% the net profits would have to be around $500,000 per year to make the

net present value of the project profitable such that the NPV is great than zero.

Furthermore, for both the 10% discount rate and the 15% discount rate the project

becomes’ acceptable under both circumstances when the annual net profits are

around $1,000,000 per year. These calculations have assumed that the cash flows

are equivalent per year and did not include potential growth rates. Also, the



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annual net profit cash flows did not take into consideration for contingent

liabilities, depreciation, and off balance sheet items such as capital leases.

Furthermore, while the net profit margin of a firm only represents managements

intellectual capacity of generating net profit out of revenue we can therefore

assume that the project only becomes desirable if the net profits are between

$500,000 and $1,000,000 per year. While we do not have access to

management’s projected cash flows and real opportunity cost of capital we can

only assume when to accept the project when certain conditions are assume.

However, as mentioned before upon reviewing Membertou’s latest annual report

and audited financial statements it appears that Membertou has currently been

borrowing at the prime rate plus 1.5% from the Royal Bank of Canada which

equates to 3.75%. After conducting an internal rate of return analysis we can

more or less guarantee that the project may break-even if annual net profits are

between $205,000 and $225,000; however, this is a risky assumption since one

cannot predict the future net profits with 100% certainty. Furthermore, the

internal rate of return analysis did not consider potential growth rates and was

analyzed over a 100-year span with perpetual cash flows.

Unfortunately, the potential success of the recreational facility can have

rippling effects throughout the Cape Breton Regional Municipality. As a

historical example, on August 5, 2008 the Cape Breton Country Recreation

Centre announced to the Cape Breton Post that it would be closing its weekly

bingo games, which up to then had lasted 31 years. Could this partially be



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blamed by the success of the Membertou Entertainment Centre in Membertou

which ran bingos five nights a week in 2005? The new recreational facility in

Membertou will also compete directly with all the local hockey rinks and sports

facilities such as YMCA, Kiwanis, and Sweeny’s Gym. There are numerous of

operators in the Cape Breton Regional Municipality that definitely will be

affected by this economic expansion. However, as economic theory suggests,

markets would not function efficiently if competition did not exist.

Conclusion

However, with a nearly 3:2 Aboriginal/Non-Aboriginal employment rate

in Membertou and the upcoming of the new incubator mall, recreational facility,

and world renowned hotel it is evident that wealth will be redistributed all across

the municipality and while competition may or may not suffer, the name of the

game is survival. While many have been opposed to the recent growth of

Membertou we must not fear projects that will bring jobs to the people and help

grow our community as a whole by bringing people of all nationalities together.

It is unknown exactly how many jobs these projects will bring with their

development; however, if corporate growth encourages members of a First Nation

community to realize the benefits of higher-level education than the social

benefits cannot overstated. Finally, some of the major weaknesses with

developing this paper included the lack of information in regards to annual

population and unemployment rates for the community of Membertou, Nova

Scotia.



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References

Government of Canada. (2009). Federal Framework for Aboriginal EconomicDevelopment. Minister of Indian Affairs and Northern, Ottawa.

Jackson, F. “All about Membertou, business hall of famers, and chitchat.” TheCape Breton Post, September 26, 2009.

Johnstone, Harvey. (2008). Membertou First Nation Indigenous PeopleSucceeding as Entrepreneurs. Journal of Enterprising Communities:People and Places in the Global Economy, Vol. 2 No. 2, 2008. EmeraldGroup Publishing Limited.

Kayseas, B., Hingle, K., Anderson, and Robert B. (2005). Fostering IndigenousEntrepreneurship: A Case Study of the Membertou First Nation, Nova

Scotia, Canada. First Nations University of Canada School of Businessand Public Administration, University of Regina, Faculty of Business.

Mackenzie, D. “County Recreation Centre sees end of bingo era.” The Cape

Breton Post, May 29, 2008.

Membertou. (2001-2009). Membertou Annual Report.

Shannon, Chris. “Membertou wants land rezoned for hotel.” The Cape BretonPost, September 10, 2009.

Statistics Canada. (2006). 2006 Community Profiles. Search Results for“Membertou 28B.”

Thayer-Scott, J. (2004). Doing Business with the Devil: Land, Sovereignty, andCorporate Partnerships in Membertou Inc., Atlantic Institute for MarketStudies. Halifax, July.

Western Economic Diversification Canada. (2005). Urban Reserves inSaskatchewan. Saskatoon, April.



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Data Appendix

Revenue and Expenditure Analysis:

Revenue and Expenditure Annual Percent Change:

2009 2008 2007 2006 2005 2004 2003 2002

Total Revenue 43,635,368 39,988,282 10,577,794 9,683,598 9,649,676 10,890,796 10,278,653 9,642,925 8,979

Expenditures (37,255,419) (38,444,354) (15,854,132) (14,525,563) (15,346,518) (15,050,867) (11,542,514) (9,602,775) (8,814,

Other Revenue 535,603 642,776 5,376,796 3,837,781 5,314,653 4,738,312 1,285,201 (38,030) (136

Net Amount 6,915,552 2,186,704 100,458 (1,004,184) (382,189) 578,241 21,340 2,120 28

Assets 43,860,219 37,277,414 25,809,120 23,094,037 17,551,931 15,660,345 13,614,741 10,467,947 9,517

Liabilities 27,530,045 24,282,412 21,458,995 18,938,206 13,383,077 12,056,575 11,057,306 7,962,378 7,495

Equity 16,330,174 12,995,002 4,350,125 4,155,831 4,168,854 3,603,770 2,557,435 2,505,569 2,022

INAC Funding 5,497,223 5,170,416 5,495,280 7,705,431 7,486,716 9,298,497 8,533,190 8,070,264 7,108

Education 4,243,999 3,754,726 2,361,663 2,329,415 2,149,035 2,131,788 2,267,350 1,696,449 1,658

Net profit margin 15.66% 5.38% 0.63% -7.43% -2.55% 3.70% 0.18% 0.02% 0

2009Delta%

2008Delta%

2007Delta%

2006Delta%

2005Delta%

2004Delta%

2003Delta%

2002Delta%

200Base

Total Revenue 9.12% 278.04% 9.23% 0.35% -11.40% 5.96% 6.59% 7.39% 0.00

Expenditures -3.09% 142.49% 9.15% -5.35% 1.96% 30.40% 20.20% 8.94% 0.00

Other

Revenue -16.67% -88.05% 40.10% -27.79% 12.16% 268.68% -3479.44% -72.10% 0.00

Net Amount 216.25% 2076.73% -110.00% 162.75% -166.10% 2609.66% 906.60% -92.57% 0.00

Assets 17.66% 44.44% 11.76% 31.58% 12.08% 15.02% 30.06% 9.98% 0.00

Liabilities 13.37% 13.16% 13.31% 41.51% 11.00% 9.04% 38.87% 6.24% 0.00

Equity 25.67% 198.73% 4.68% -0.31% 15.68% 40.91% 2.07% 23.87% 0.00

INAC Funding 6.32% -5.91% -28.68% 2.92% -19.48% 8.97% 5.74% 13.53% 0.00

Education 13.03% 58.99% 1.38% 8.39% 0.81% -5.98% 33.65% 2.29% 0.00



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Expenditures on Education and Investment in Assets

Year Education Assets

2009$ 4,243,999.00 $ 43,860,219.00

2008 $ 3,754,726.00 $ 37,277,414.00

2007 $ 2,361,663.00 $ 25,809,120.00

2006 $ 2,329,415.00 $ 23,094,037.00

2005 $ 2,149,035.00 $ 17,551,931.00

2004 $ 2,131,788.00 $ 15,660,345.00

2003 $ 2,267,350.00 $ 13,614,741.00

2002 $ 1,696,449.00 $ 10,467,947.00

2001 $ 1,658,401.00 $ 9,517,815.00

$-

$5,000,000.00

$10,000,000.00

$15,000,000.00

$20,000,000.00

$25,000,000.00

$30,000,000.00

$35,000,000.00

$40,000,000.00

$45,000,000.00

$50,000,000.00

2 0 0 9

2 0 0 8

2 0 0 7

2 0 0 6

2 0 0 5

2 0 0 4

2 0 0 3

2 0 0 2

2 0 0 1

Education

Assets

Correlation Matrix

Education Assets

Education 1.000

Assets .965 1.000

9 sample size

± .666 critical value .05 (two-tail)

± .798 critical value .01 (two-tail)



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Source: Statistics Canada, Census 2006


48.00%

31.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Aboriginal Non-Aboriginal

Share of Population Under the Age of 25

66.00%

85.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%


Share of Population with a Degree, Certificate, or Diploma



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14.80%

6.30%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%


Unemployment Rate

$23,888.00

$35,872.00

$-

$5,000.00

$10,000.00

$15,000.00

$20,000.00

$25,000.00

$30,000.00

$35,000.00

$40,000.00


Average Income



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Sensitivity Analysis:

Project with 5% discount rate

Annual Perpetual

Discount rate Investment Net Profit Present Value NPV

5.00% (6,000,000) 250,000 5,000,000 (1,000,000)

5.00% (6,000,000) 500,000 10,000,000 4,000,0005.00% (6,000,000) 1,000,000 20,000,000 14,000,000

5.00% (6,000,000) 1,500,000 30,000,000 24,000,000

5.00% (6,000,000) 2,000,000 40,000,000 34,000,000


Annual Perpetual


10.00% (6,000,000) 250,000 2,500,000 (3,500,000)

10.00% (6,000,000) 500,000 5,000,000 (1,000,000)

10.00% (6,000,000) 1,000,000 10,000,000 4,000,000

10.00% (6,000,000) 1,500,000 15,000,000 9,000,000

10.00% (6,000,000) 2,000,000 20,000,000 14,000,000


Annual Perpetual


15.00% (6,000,000) 250,000 1,666,667 (4,333,333)

15.00% (6,000,000) 500,000 3,333,333 (2,666,667)

15.00% (6,000,000) 1,000,000 6,666,667 666,667

15.00% (6,000,000) 1,500,000 10,000,000 4,000,000

15.00% (6,000,000) 2,000,000 13,333,333 7,333,333



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Internal Rate of Return Analysis: (Perpetual Cash Flows at 100 Years)

Investment Net Profit IRR

(6,000,000) 200,000 #NUM!

(6,000,000) 205,000 3.28%

(6,000,000) 210,000 3.37%

(6,000,000) 215,000 3.46%(6,000,000) 220,000 3.56%

(6,000,000) 225,000 3.65%

(6,000,000) 250,000 4.09%

(6,000,000) 500,000 8.33%

(6,000,000) 750,000 12.50%

(6,000,000) 1,000,000 16.67%

(6,000,000) 1,250,000 20.83%

(6,000,000) 1,500,000 25.00%

Internal Rate of Return Sensitivity Analysis:

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

0 500,000 1,000,000 1,500,000 2,000,000

Documents

The Economics of Corporate Growth in a First Nation Community