Three Spheres of Performance

Preserving Options and Opportunities – Avoiding Unintended Consequences

As two Nova Scotia communities face major job losses with the potential permanent closure of pulp and paper mills, there are lessons to be learned from the experiences of others who have faced this situation previously.

Over the past several years, Halifax Global has worked directly with three communities in Eastern and Northern Ontario, as well as with a provincial government, to help them define pathways to a sustainable future forest industry in the wake of a major pulp – paper mill closure. We have learned much from each situation about enhancing opportunities, options and potential for success, as well as about unintended consequences that result from statutes, policies and regulations developed in a different era for different sets of circumstances.

Three particular lessons are important for Port Hawkesbury and Liverpool, and for the Province.

Retain and Preserve Infrastructure and Equipment

When a mill or a paper machine is shut down permanently, it is reasonable to expect the owner wants to ensure that production capacity is permanently removed from the marketplace. This is especially the situation in the newsprint industry, where the overriding, fundamental challenge is declining demand and excess production capacity.

In a shutdown, the paper machine is likely to be scrapped or have major components removed to ensure no future paper production. However, mill infrastructure such as pulp lines, electrical and control systems, waste treatment, shipping and warehousing, and office facilities all have potential for future use by new ventures that will not be competitive with the prior owner’s business. Such infrastructure can be leveraged by economic development agencies to support establishment of new ventures.

Ensuring that availability, however, requires collaboration among all stakeholders, including the community, the Province and the mill owner to ensure that assets are preserved, kept heated where essential and maintained at basic levels to ensure future usability.

Look to the Future – Try New Things

As a communications medium, newsprint is not quite a ‘buggy whip’ industry, but it’s getting closer. However, as I have noted previously, new industries need to be considered as part of Nova Scotia’s future forest sector. Examples can include biochemical extraction and processing of hemicelluloses (sugars) in woody biomass to facilitate production of five and six carbon sugars which can be processed into advanced biofuels, biopolymers and other products. The cellulose fibre and lignin can also be processed into advanced composites; and residual materials can be cost effective feedstock for bioenergy generation.

Interesting new research being undertaken in Canada shows promising potential for conversion of thermo-mechanical pulp (TMP) lines to bio-refining applications. TMP is the pulping technology used at both Port Hawkesbury and Liverpool and idled TMP capacity at either or both facilities may be suitable for pilot or early stage commercial scale demonstrations to prove technology viability.

Such ventures will not instantaneously replace the employment lost through mill closures. But, they can lead to development of locally-based, knowledge and technology intensive industries that can sustainably process our forest resources over the longer term.

Avoiding Unintended Consequences

Rightly so, shut down of a heavy industrial facility such as a paper mill can trigger regulatory requirements for mitigation and remediation of environmental impacts. However, these statutes and regulations were developed in an era when mill closures resulting from major decline of an entire industrial sector were not anticipated. Hence, efforts to develop new ventures on such a site can be seriously constrained if there is insufficient flexibility permitting alternative uses incorporated into environmental policies and regulations. The result can be a mill site rendered unavailable for potential new ventures for such a period that infrastructure deteriorates beyond any useful level. The outcome – definitely unintended – can be a community facing a potentially even larger remediation challenge at a site which by then will have limited or no economic development potential.

Application of these lessons to the benefit of Nova Scotia communities will be challenging, especially in the context of bankruptcy-related processes underway in connection with the Port Hawkesbury mill. However, with creativity and willingness to pursue new directions by all stakeholders, a sustainable forest sector of the future can be found in approaches and product streams that capture value from the widest possible range of properties of our resources.

The Halifax Global team has had a very busy summer talking with our clients’ customers, suppliers, funders and other key stakeholders.

It has been a summer of global and regional uncertainty, an environment where there is a tendency to agonize over exchange and future interest rates, the price of energy, the reliability of sales forecasts and so on. It has been and is a season of second guessing and often hunkering down staying the course, regardless.

But, it is the ideal time to assess the validity of strategic and operational plans to ensure that they reflect the realities of the current and future marketplace and most importantly to determine if your organization is meeting the needs and expectations of your customers and other critical stakeholders. You can benefit from their insights into future marketplace trends and what will be important for them and for you in the foreseeable future.

You can learn about and understand if your organization is meeting your major customers’ and other stakeholders’ expectations – your areas of strength as well as your gaps and weaknesses. This information can be obtained by having a third party undertake confidential consultations following an introduction from you, the client. When we undertake such assignments, we advise the interviewee at the outset that our conversation is kept confidential and what we share with the client is an aggregated summary of “What we Heard” from all stakeholders.  Following this introduction, we then ask for them to be completely candid – and they typically are. The questions asked are predetermined and developed with the client and tailored to the specifics of the situation. There are often two categories of questions with the first set being performance and relationship specific and the second set more geared to the marketplace in general. 

We have found this approach to be very effective with the following groups:

• Significant customers of private sector companies;
• Key suppliers to companies, particularly if the company is a value added reseller of suppliers’ products where the relationship is similar to a client relationship;
• Funders and donors of not-for-profit organizations;
• Fee-paying members of trade associations and similar organizations;
• Partners and collaborators of research and other academic institutions / organizations; and
• Board members of any organization or company.

Based on our experiences, the third party consultation process provides unbiased intelligence and valuable knowledge about the perceptions others have of your company or organization, including:

• Insight into how you are meeting or not meeting client expectations that then allows you to tailor initiatives and strategies focused on improving customer service and identified gaps and weaknesses.
• The ability to measure client satisfaction over time. We typically ask customers to rate the services provided by our clients on a scale of 1 to 5. We then provide rating details and averages to our client as part of “What we Heard”. We are currently undertaking the third bi-annual consultations for one client, a process started in 2007.
• Input into future marketplace trends that allow you to link to the needs of your customers, vendors, suppliers and other key stakeholders.
• The ability to ensure your programs and areas of focus are aligned with the expectations of your funders, fee paying members, and clients.
• The insight necessary to create valid economic models for not-for-profit organizations to create a bridge from start up funding model to one of independent sustainability based on unbiased stakeholder input.
• An understanding of key partners’ and collaborators’ perceptions of who you are and what you do.

We have been engaged to carry out stakeholder consultations in conjunction with employee surveys that then allow our clients to determine linkages and create client-focused action plans.

We have found that an ancillary benefit of this independent consultative process is a heightened sense of engagement between our client and the stakeholders interviewed. Customers and stakeholders truly appreciate the ability to provide input that will make a difference in the future relationship with valued suppliers, service providers, funders, partners and donors. We often receive comments at the conclusion of the interviews such as:

• “This process is great”
• “Appreciated the opportunity”
• “Great that ‘client’ is doing this. Their competitors are not.”

While you cannot plan with certainty what will happen in the future, you can plan with the certainty of knowing what your customers and other key stakeholders truly value from their relationship with you.

 While the impending shut down of the NewPage paper mill in Port Hawksbury will cause significant economic disruption, especially in the Straits area, the situation should be viewed by the Provincial Government as an opportunity to begin promoting transition to a new, sustainable approach to use of Nova Scotia’s forest resources.

Some Background and Some Facts

 First, some facts about the power rate situation. Yes, electricity prices are rising in Nova Scotia, as they are in virtually every other jurisdiction in the world which relies on hydrocarbons as the primary fuel for electricity generation. But, no, even with proposed increases, industrial power rates in Nova Scotia will not be significantly higher than in other areas with a similar generation mix.

Indeed, existing industrial power rates in New Brunswick, Ontario, Maine, Michigan and Wisconsin – all jurisdictions with significant forest products industries and forest industries closures – already exceed rates requested but not yet approved in Nova Scotia. And rates in many other jurisdictions are higher still.

Second, some facts about markets for paper produced at Port Hawksbury. Demand for newsprint in North America today has declined by more than 60% from levels that prevailed as recently as 2005. Demand for supercalendared paper has also declined significantly, though not as precipitously as for newsprint.

Market prices for both types of paper have also declined over the past several years and are widely recognised in the industry to be at or below cost of production. And for Port Hawksbury, the changing relative values of the Canadian and US Dollars has represented a double hit –a decline of 33% in the US Dollar market price for paper over the same period as the Canadian Dollar has increased from roughly USD 0.80 to slightly above parity represents about a 50% effective price drop for the Port Hawksbury mill in Canadian Dollars. Multiplied by 600,000 tonnes of output, the effective Canadian Dollar revenue decline is dramatic.

The challenges faced by NewPage in Port Hawksbury, as well as by AbitibiBowater in Liverpool, reflect fundamental transformation of global forest products markets, and cannot be resolved through artificially reduced power rates and what would amount to effective subsidisation by other rate payers.

(In the interests of full disclosure, it should be noted that over recent years Halifax Global has advised both the Nova Scotia Government and Nova Scotia Power on issues related to comparative energy costs and forest sector competitiveness.)

Towards a New Forest Products Value Proposition

A sustainable value proposition for Nova Scotia’s forest industries will likely be found in a combination of processing technologies and product streams that capture value from the widest possible range of properties of current and future forest resources. Lumber and pulp and paper may continue to be part of the mix, but with North American lumber production having declined almost 50% since 2005, and demand for paper declining as well, these segments will likely become a reduced portion of the overall sector.

New industries need to be considered as part of Nova Scotia’s future forest sector. Examples can include biochemical extraction and processing of the hemicelluloses (sugars) in woody biomass to facilitate production of five and six carbon sugars which can be fermented and processed into advanced biofuels, biopolymers and other products The cellulose fibre and lignin that remain after such processes also exhibit enhanced unit energy values and can be used for production of sustainable, renewable bioenergy.

Development of an agro-forestry industry to produce purpose-grown bioenergy crops, (eg. willow, miscanthus, reed canarygrass, switchgrass), has potential as part of the future forest sector. Cultivation of such crops can offer the agriculture sector potential new cash crops; and, applicability of completely mechanised planting and harvesting processes can ensure predictable and lower costs than conventional forest harvesting.

A sustainable future forest sector in Nova Scotia will need to include a combination of outputs that generate sufficient value to ensure viability for all product streams, whether conventional or alternative. As hydrocarbon costs continue to rise – and they will – we need to look to a wide range of forest and agro-forestry opportunities to achieve sustainable value and energy relationships based on our renewable resources.

Using wood to generate energy is not a new concept. Man has used wood for heat and light since the beginning of time. Forest products manufacturers have also been using wood fibre to generate heat and electricity for many decades.

So, why have proposed projects to use biomass to generate electricity proved to be so challenging?

Historic Value Relationships Changing

Traditionally, combined heat and power generation — cogeneration – at forest products manufacturing plants has relied on an economic balance that has prevailed for most of the past century. As an outcome of the harvesting and processing of trees into lumber or other wood products, into wood chips that become pulp furnish or roundwood that also becomes pulp furnish, bark and other residuals become feedstock for energy generation.

The key to viability is that the overall balance of total use and conversion of harvested material into some combination of wood, pulp and paper products and energy was maintained.

 The economic reality of this relationship has been that most of the cost of harvesting and processing has been absorbed by higher value products – lumber, pulp, paper – with the result that remaining residuals became low cost feedstock for heat and power production, also mostly used in process. But even in situations in which surplus heat and power could be sold to other users or the grid, the low cost of the residual feedstock created a viable economic relationship for the energy producing facility.

Financial Markets Crash and US Recession Have Changed Value Relationship

Most important have been changes in US demand for housing:

• Household formations in the US at historically low levels –
  A recent US Census Bureau Report[1] notes that between March 2009 and March 2010, the number of households rose by 357,000, the smallest increase since 1947. The previous year, households increased by only 398,000, the third smallest increase on record. These are steep drops from the 2002–07 period, when household increases averaged 1.3 million a year. This drop largely explains why the housing glut remains stubbornly high, despite decreases in housing starts.
• Housing starts remain at historic lows –
  US Census Bureau data[2] shows that housing starts in February, 2011 in the US were at a seasonally adjusted annual rate of 479,000, down more than 20% from February, 2010.
• Housing starts outpaced household formations for more than a decade –
  US Census Bureau and Department of Commerce data show that new housing starts have exceeded the rate of household formations for more than ten years.Over the thirteen year period shown in the graph, the number of homes built by the US housing industry exceeded the number of households formed during the period by more than 3 million. Even after allowing for purchases of second vacation homes, replacement of destroyed and dilapidated housing and other normal replacement factors, it is clear that the US overbuilt housing by a significant margin. That excess inventory remains in the marketplace, much of it held by financial institutions through foreclosure activity.
• Declining home ownership lowers demand for wood products –
  As reported in Random Lengths Yardstick publication, (September 2010), owner-occupied housing declined to 66.9% of the US housing mix, the third consecutive quarterly decline and well below the historical peak of 69.2% reached during the fourth quarter of 2004. This decline is linked directly to reduced demand for single family housing.
• Inventory of unsold homes in US continues to depress new home sales –
  Economists at California’s Chapman University point out that with two million houses either on lender balance sheets or predicted to be headed there, it will take five years to absorb the inventory under normal economic conditions. High unemployment and consumer debt may extend that to eight to 10 years.[3]
• Home foreclosures in US continue to dampen real estate demand –
  According to a Congressional Oversight Panel report[4], approximately 250,000 new foreclosures are started every month, while 100,000 are completed. This has widespread impact, experts say, because foreclosures negatively affect neighbourhoods and drive down local real estate values, resulting in more cautious and less free spending consumers, further depressing the economy. The Panel estimates that up to 13 million foreclosures will have occurred by 2012 since its formation in 2008.

Changing Patterns of Demand for Paper Further Upset Industry Balance

The paper industry side of the value balance has also experienced disruptions.

North American demand for newsprint has decline by more than 60% since 2005 and close to seven million tonnes of production capacity has been permanently shut down or idled. Recent analysts reports indicate that even with recent price increases, most newsprint producers cannot achieve financial breakeven. Industry statements predict additional capacity reductions.

Demand for other printing papers has also declined, though more a result of reductions in economic activity rather than structural change.

Paper producers have also been affected by reductions in lumber demand, because closed sawmills don’t produce wood chips needed as pulp furnish. The result is that some mills have had to resort to whole tree chipping and face increased costs.

More Fundamental Changes Underway

Together, these changes in product demand have resulted in a 44% – 45% decline in softwood lumber production across North America since 2005. While that decline has been somewhat offset by recent increased sales to China and India by west coast producers, current levels of forest harvesting and lumber production in Central and Eastern Canada remain 50% – 60% below peak levels of 2005-06.

Additional downward pressure on demand for wood products may become permanent, as increasing energy costs appear to be driving other shifts US housing demand.

There is evidence of reductions in average home size for both single family and multi-unit dwellings, and of multi-unit buildings representing an increased share of total housing starts[5]. It is premature to conclude these changes represent permanent shifts in demand, but if these trends become the norm, the result will be further reductions in demand for wood building products.

Bioenergy Production Requires New Value Relationship

Conventional forest products manufacturing and cogeneration has been viable because costs of harvesting, transport and processing were absorbed primarily by the higher valued products – wood products and pulp and paper. However, with the structural shifts in demand for those
products a new value balance is needed.

But, the question remains, what is the new, sustainable value relationship?

Possible Future Relationship?

Single product streams such as wood pellets are unlikely to be viable. Electricity generation costs from pellets at current (May 2011) market prices are about 15 percent higher than costs of generating electricity from heavy fuel oil. Pellet prices need to be reduced by 30%, or heavy fuel oil increased by a similar amount, for conventional pellets to be competitive as an energy fuel.

What Might Be The New Value Relationship?

A sustainable economic relationship for biomass to bioenergy will likely be found in a combination of processing technologies and product streams that capture value from the widest possible range of properties of the feedstock, including in particular biochemical extraction. For example, extraction and processing of the hemicelluloses (sugars) in woody biomass facilitates production of five and six carbon sugars which can be fermented and processed into advanced biofuels, biopolymers and other products. The remaining cellulose fibre and lignin exhibit increased unit energy values and additional advantageous properties, such as becoming more hydrophobic than conventional pellets.

Purpose-grown bioenergy crops, (eg. willow, miscanthus, reed canarygrass, switchgrass), are also likely to become part of the long term sustainable feedstock mix. Cultivation of such crops offers the agriculture sector potential new cash crops; and, applicability of completely mechanised planting and harvesting processes can ensure predictable and lower costs than conventional forest harvesting.

Biomass technologies and projects for which proposed economics are based on naïve assumptions of conventional forest industries producing vast piles of unused waste materials will prove to be unviable – primarily because the ‘waste’ simply doesn’t exist. And, it certainly doesn’t exist at the close to zero cost frequently incorporated into such venture proposals.

What will prove viable and sustainable will be a combination of outputs that generate sufficient value to ensure reasonable feedstock costs for each product stream. As the cost of oil rises, achieving that new value relationship for biomass becomes easier. But, proponents seeking to develop new projects, whether greenfield or repurposing idled forest products facilities, should include multiple partners and technologies needed for a sustainable value relationship.

This post is prompted by a column in the February 24th, 2011 Chronicle-Herald by Peter Halpin, Executive Director of the Atlantic Association of Universities — www.thechronicleherald.ca/Letters/1229890.html — which challenges the perspective of the Halifax Chamber of Commerce on the role of universities in our local and regional economy.

While I share some of the AAU’s concerns, I will also respectfully submit that basing a criticism of the Chamber’s Outlook 2011 document on the key findings of an economic impact study is not an argument that leads from strength. More about that below, but for those interested in knowing more about just how important universities are to our economy, the full study, as well as summary versions and other related policy papers can be found at this link — www.atlanticuniversities.ca/AbsPage.aspx?siteid=1&lang=1&id=6

I also share some of the concerns the Chamber articulates in its description of education as an ‘Issue’, but suggest as well that as an argument for change, this position too does not lead from strength. More about that below as well, but for those interested, the full details of the Chamber’s Outlook report can be found at the following link — www.halifaxchamber.com/files/15/88/BVoutlook2011.pdf

The Sacred Cow Perspective

The Chamber’s Outlook 2011 Report addresses education in the ‘issues’ section, not in the industries section. Specifically with regard to universities, the Chamber seems to adopt the views of Dr. Tim O’Neill, (expressed in his report to the Premier), with regard to the market challenges of declining university-age population, [within the region], suggesting the “province may not be able to support as many institutions as it has and that smaller niche schools may have to look to their larger cousins for opportunities to cooperate or even merge”. The Chamber document goes on to state that the number, role and position of universities in Nova Scotia needs to be viewed within the context of the “ongoing discussion about the size and cost of government” and examined along with “other government expenditures”. The Chamber calls on the universities to do a better job of explaining the value they bring to our economy and our society and notes that if an acceptable [to whom?] argument can’t be made, “then we need to cast a critical eye on them”.

In its Outlook report, the Chamber seems to imply that universities are simply another government expenditure, like health care, roads or social assistance. This view does not reflect the sources of revenues and range of economic activity of our universities.

To illustrate, there are currently almost 17,000 students enrolled at Dalhousie — more than half these students come from outside Nova Scotia, representing significant incremental ‘export earnings’ for the province. And, it should be noted, proportionately Dal is neither the most internationally nor the most externally focussed institution in the province. Within the Halifax area, both St. Mary’s and Mount Saint Vincent attract significant numbers of international students.  

On the research front, Dalhousie’s total funded research activity this year will approach $150 million — more than two-thirds of which originates from sources other than the Nova Scotia Government and the federal Tri-Council granting agencies. This too represents a form of ‘export earnings’ for Nova Scotia. And faculty at all post-secondary institutions in Nova Scotia — including the other universities and the Nova Scotia Community College and the Nova Scotia Agriculture College — actively pursue and engage in international research contracts and activities that generate incremental revenues to Nova Scotia. These international projects represent a valuable source of export earnings for both the institutions involved and the province and total, even with a relatively limited effort, roughly $10 – $15 million in export earnings annually.

Nonetheless, notwithstanding these acknowledged or unacknowledged strengths, Nova Scotia’s universities collectively and individually face significant strategic business and market challenges related to continuing declines in high school graduations within the region, as well as from declining public sector funding support that is also attributable to the demographic profile of our population.

The Strategic Assets Perspective

The AAU has cited a number of key points and facts about the economic impact of universities in Halifax. These need not be repeated here, except to note that the points raised and the full study from which these points are drawn clearly illustrate that universities constitute a signficant ‘industry’ in our local, provincial and regional economy.

The AAU’s argument relies on economic impact data that seems to say ‘we’re big and we’re important’, but the ‘Chamber is not showing us proper respect’. There may well be merit in that position but its weakness is that its founded on data that in effect says ‘here’s what you did for me yesterday’.

I don’t equate Nova Scotia’s universities with the auto sector, but for me the reliance on the economic impact data contains echoes of the ‘we’re too important to fail’ arguments put forward by General Motors and Chrysler as they faced the abyss of plummeting sales and crashing financial markets in late 2008 and early 2009. Over the years, those companies had invested in plants and facilities that they undoubtedly viewed as strategic assets at the time. But when assets are misaligned with market shifts, their strategic value diminishes markedly.

Economic impact data is inherently backward focused and provides no real linkage to future directions and opportunities. In particular, in the context of the substantive strategic business and market challenges faced by our universities, there is a need for articulation of how the institutions’ existing and developing asset base can serve to leverage new sources of revenue and growth.

Towards an Alternative, Strategic Perspective

Unfortunately, neither the sacred cow nor the strategic assets perspectives articulated by the Chamber and AAU respectively are particularly helpful in creating a strategic framework within which our universities can address identified business and market challenges and opportunities and chart new courses towards sustainable growth.

By most measures, the education and related research ‘product’ our institutions deliver is high quality and well regarded internationally. It also demonstrates strong market acceptance. Nova Scotia’s universities, indeed its entire post-secondary education sector is, in our view, a significant economic sector for Nova Scotia, with substantial potential for growth.

Some of that high potential future and growth is beginning to emerge –

• The impending launch of the Halifax Marine Research Institute and the related Canada Excellence Research Chair (CERC) in Ocean Science and Technology will represent a new benchmark for collaboration and engagement between multiple institutions, and the private and public sectors focused on a wide range of issues related to oceans — an area in which Nova Scotia has natural credibility and competitive strength;
• The imminent opening of the Innovacorp Enterprise Centre and the adjoining Life Sciences Research Institute will combine office and lab space with enhanced incubation capability that will contribute to the growth and success of new life sciences companies, many of which will be based on technologies developed at our universities; and,
• The Biomedical MRI Research Laboratory (BMRL) at Halifax’s IWK Health Centre, together with the Neuroimaging Research Laboratory (NRL) at the QE II Health Sciences Centre, represent effective collaborations between the universities, the hospitals, government and the private sector and enable life science companies in the Halifax region to pursue research and development, technology transfer and new product commercialization.

But significantly more is possible. Our universities and our P-12 education system are staffed by highly educated people with expertise that is in demand internationally. Nova Scotia’s academics and education professionals have significant, recognised expertise in areas related to curriculum development and delivery of education programming, coastal zone management, oceans, environmental management, community economic development, entrepreneurship and business management The annual global market for education-related services alone totals roughly $2 trillion; and opportunities in the other areas mentioned represent an annual market opportunity of another $500 million plus annually.

The AAU quotes Mike Harcourt, former Premier of British Columbia and former Mayor of Vancouver as recently telling Haligonians that “your universities provide the foundation and opportunity to move Halifax from good to great”. Note, however, his emphasis was very much on ‘foundation and opportunity’. He did not say that we are great, but rather that we could become great with effective leverage of the knowledge and expertise contained within our universities.

The knowledge and expertise contained within our education sector is one of Nova Scotia’s most effective strategic assets. But like all business assets, it needs to be leveraged and focused — on where markets are going tomorrow, not where they have been. Our universities, indeed all the institutions within our education sector employ people with skills, expertise and knowledge that is in demand and that can be sold globally. Through active and aggressive pursuit of global market opportunities combined with collaboration with each other and with private and other public sector partners, Nova Scotia’s and Atlantic Canada’s education institutions could become our most significant, knowledge-based export earners. In short, they could become great and be recognised by all, including the Chamber, as a substantial industry, not just an issue.