October 30, 2015 -Quebec’s US$1 billion bailout for aerospace company Bombardier Inc is meant to protect thousands of jobs in one of the province’s top industries, but risks worsening the finances of Canada’s most indebted province if it fails.
The deal would give Quebec’s Liberal-run government a 49.5 percent stake in Bombardier’s troubled CSeries jet program, according to the announcement on Thursday, easing shareholder fears about the company’s future but triggering an outcry from taxpayer advocates and opposition politicians.
“This is what we call corporate welfare,” said Aaron Wudrick, the federal director of the Canadian Taxpayers Federation, adding the deal could lead to long-term costs for Quebec taxpayers if it fails.
The province, which has practically frozen money for social services and education as it tries to balance its budget in the current fiscal year, had a deficit of CUS$2.35 billion for the last year ended March 31. There is also public disenchantment following a wide-ranging corruption probe into the awarding of construction contracts.
But the fortunes of Quebec’s aerospace sector are closely tied to those of Bombardier, a household name in the province. Its 18,000-strong workforce in Quebec is largely aerospace-focused and its presence in the province helps support many smaller part vendors and suppliers in the region.
The aerospace industry makes up about 10 percent of Quebec’s export revenues, about 1.5 percent of its gross domestic product, and about 40,000 jobs that pay double the provincial average – making it an economic lynchpin.
Bombardier is majority-owned by the Bombardier-Beaudoin family, which has traditionally had close connections with the political establishment in Quebec.
“The decision to do nothing, it’s something we couldn’t even consider,” Quebec Economy Minister Jacques Daoust told Reuters after announcing the deal. “The day that Bombardier is in difficulty, the entire aerospace industry is in difficulty.”
Quebec is pumping money into its financing arm Investissement Quebec to support the CSeries project, but is not making a broader investment in Bombardier which has a profitable rail unit.
It is the biggest investment to date made by Investissement Quebec, which holds stakes in several other companies deemed critical to Quebec’s economic development, such as the Stornoway diamond mine and the Alouette aluminum smelter.
Bombardier’s narrow-body CSeries line of jets, which is set to compete against Boeing Co’s BA.N 737 planes and Airbus Group’s A319 and A320 jets, has been delayed for years and is billions of dollars over budget. The struggle to get the CSeries project done and in the air has left Bombardier saddled with more than US$9 billion in debt.
The gamble faces further big risks as new orders for the CSeries jet have dried up in a soft market.
Bombardier touted the fuel economy of the CSeries, which has a 20 percent fuel burn advantage over comparable planes, as a key selling point. But that advantage has been lessened by lower oil prices and competition from new generation planes built by Boeing and Airbus that have been outfitted with fuel efficient engines.
In a bid to raise cash, Bombardier has been looking at a wide range of options, including the sale of a stake in the CSeries and the sale of a minority stake in its rail arm.