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CAPE BRETON UNIVERSITY

The Economics of
Corporate Growth in a
First Nation
Community
A Case Study of Membertou First Nation
Roger Mellen
12/17/2009

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 Membertous 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 130room 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,

Membertous 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 dont
know the true intentions of the stipulations for the federal transfer payments.
Henceforth, one could assume through the evaluation of Membertous 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 Scotias 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 Membertous 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 Membertous 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 selfsufficiency; 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 Membertous 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
(Membertous fiscal period runs from April to March per annum) Membertou
spent $4,243,999. This represents a growth rate of 156-percent in only eightyears. 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
Membertous portfolio we have seen that there does exist a strong relationship
between Membertous 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 nations 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 Canadas 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 Canadas 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
Membertous 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

managements 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 Membertous 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 Sweenys 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 Economic
Development. Minister of Indian Affairs and Northern, Ottawa.
Jackson, F. All about Membertou, business hall of famers, and chitchat. The
Cape Breton Post, September 26, 2009.
Johnstone, Harvey. (2008). Membertou First Nation Indigenous People
Succeeding as Entrepreneurs. Journal of Enterprising Communities:
People and Places in the Global Economy, Vol. 2 No. 2, 2008. Emerald
Group Publishing Limited.
Kayseas, B., Hingle, K., Anderson, and Robert B. (2005). Fostering Indigenous
Entrepreneurship: A Case Study of the Membertou First Nation, Nova
Scotia, Canada. First Nations University of Canada School of Business
and 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 Breton
Post, 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, and
Corporate Partnerships in Membertou Inc., Atlantic Institute for Market
Studies. Halifax, July.
Western Economic Diversification Canada. (2005). Urban Reserves in
Saskatchewan. Saskatoon, April.

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Data Appendix

Revenue and Expenditure Analysis:

Total Revenue
Expenditures
Other Revenue
Net Amount

2009
43,635,368
(37,255,419)
535,603
6,915,552

2008
39,988,282
(38,444,354)
642,776
2,186,704

2007
10,577,794
(15,854,132)
5,376,796
100,458

2006
9,683,598
(14,525,563)
3,837,781
(1,004,184)

2005
9,649,676
(15,346,518)
5,314,653
(382,189)

2004
10,890,796
(15,050,867)
4,738,312
578,241

2003
10,278,653
(11,542,514)
1,285,201
21,340

2002
9,642,925
(9,602,775)
(38,030)
2,120

2001
8,979,471
(8,814,598)
(136,328)
28,545

Assets
Liabilities
Equity

43,860,219
27,530,045
16,330,174

37,277,414
24,282,412
12,995,002

25,809,120
21,458,995
4,350,125

23,094,037
18,938,206
4,155,831

17,551,931
13,383,077
4,168,854

15,660,345
12,056,575
3,603,770

13,614,741
11,057,306
2,557,435

10,467,947
7,962,378
2,505,569

9,517,815
7,495,033
2,022,782

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

7,108,708

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

1,658,401

Net profit margin

15.66%

5.38%

0.63%

-7.43%

-2.55%

3.70%

0.18%

0.02%

0.32%

Revenue and Expenditure Annual Percent Change:

Total Revenue
Expenditures
Other
Revenue
Net Amount

2009
Delta%
9.12%
-3.09%

2008
Delta%
278.04%
142.49%

2007
Delta%
9.23%
9.15%

2006
Delta%
0.35%
-5.35%

2005
Delta%
-11.40%
1.96%

2004
Delta%
5.96%
30.40%

2003
Delta%
6.59%
20.20%

2002
Delta%
7.39%
8.94%

2001
Base%
0.00%
0.00%

-16.67%
216.25%

-88.05%
2076.73%

40.10%
-110.00%

-27.79%
162.75%

12.16%
-166.10%

268.68%
2609.66%

-3479.44%
906.60%

-72.10%
-92.57%

0.00%
0.00%

Assets
Liabilities
Equity

17.66%
13.37%
25.67%

44.44%
13.16%
198.73%

11.76%
13.31%
4.68%

31.58%
41.51%
-0.31%

12.08%
11.00%
15.68%

15.02%
9.04%
40.91%

30.06%
38.87%
2.07%

9.98%
6.24%
23.87%

0.00%
0.00%
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

2009
2008
2007
2006
2005
2004
2003
2002
2001

Education

Assets

$ 4,243,999.00

$ 43,860,219.00

$ 3,754,726.00

$ 37,277,414.00

$ 2,361,663.00

$ 25,809,120.00

$ 2,329,415.00

$ 23,094,037.00

$ 2,149,035.00

$ 17,551,931.00

$ 2,131,788.00

$ 15,660,345.00

$ 2,267,350.00

$ 13,614,741.00

$ 1,696,449.00

$ 10,467,947.00

$ 1,658,401.00

9,517,815.00

$50,000,000.00
$45,000,000.00
$40,000,000.00
$35,000,000.00
$30,000,000.00
$25,000,000.00
$20,000,000.00
$15,000,000.00
$10,000,000.00
$5,000,000.00
$-

Education

2001

2002

2003

2004

2005

2006

2007

2008

2009

Assets

Correlation Matrix
Education

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Assets

Education

1.000

Assets

.965

1.000

sample size

.666

critical value .05 (two-tail)

.798

critical value .01 (two-tail)

Share of Population Under the Age of 25


60.00%
48.00%

50.00%
40.00%

31.00%

30.00%

20.00%
10.00%
0.00%
Aboriginal

Non-Aboriginal

Source: Statistics Canada, Census 2006


Share of Population with a Degree, Certificate, or Diploma
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

85.00%
66.00%

Aboriginal

Source: Statistics Canada, Census 2006

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Non-Aboriginal

Unemployment Rate
14.80%

16.00%
14.00%
12.00%
10.00%
8.00%

6.30%

6.00%
4.00%
2.00%
0.00%
Aboriginal

Non-Aboriginal

Source: Statistics Canada, Census 2006

Average Income
$40,000.00

$35,872.00

$35,000.00
$30,000.00
$25,000.00

$23,888.00

$20,000.00
$15,000.00
$10,000.00
$5,000.00
$Aboriginal

Source: Statistics Canada, Census 2006

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Non-Aboriginal

Sensitivity Analysis:
Project with 5% discount rate
Discount rate
5.00%
5.00%
5.00%
5.00%
5.00%

Investment
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)

Annual
Net Profit
250,000
500,000
1,000,000
1,500,000
2,000,000

Perpetual
Present Value
5,000,000
10,000,000
20,000,000
30,000,000
40,000,000

NPV
(1,000,000)
4,000,000
14,000,000
24,000,000
34,000,000

Annual
Net Profit
250,000
500,000
1,000,000
1,500,000
2,000,000

Perpetual
Present Value
2,500,000
5,000,000
10,000,000
15,000,000
20,000,000

NPV
(3,500,000)
(1,000,000)
4,000,000
9,000,000
14,000,000

Annual
Net Profit
250,000
500,000
1,000,000
1,500,000
2,000,000

Perpetual
Present Value
1,666,667
3,333,333
6,666,667
10,000,000
13,333,333

NPV
(4,333,333)
(2,666,667)
666,667
4,000,000
7,333,333

Project with 10% discount rate


Discount rate
10.00%
10.00%
10.00%
10.00%
10.00%

Investment
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)

Project with 15% discount rate


Discount rate
15.00%
15.00%
15.00%
15.00%
15.00%

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Investment
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)

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


Investment
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)
(6,000,000)

Net Profit
200,000
205,000
210,000
215,000
220,000
225,000
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000

IRR
#NUM!
3.28%
3.37%
3.46%
3.56%
3.65%
4.09%
8.33%
12.50%
16.67%
20.83%
25.00%

Internal Rate of Return Sensitivity Analysis:


30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
0

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500,000

1,000,000

1,500,000

2,000,000