Canada

Handout haven

In spite of Liberal promises, Ottawa continues to subsidize businesses

JOHN GEDDES November 2 1998
Canada

Handout haven

In spite of Liberal promises, Ottawa continues to subsidize businesses

JOHN GEDDES November 2 1998

Handout haven

JOHN GEDDES

In spite of Liberal promises, Ottawa continues to subsidize businesses

Politicians, bureaucrats and corporate lobbyists alike wince at the words: business subsidies. They offer up a thesaurus-worthy list of alternatives. “Investment” is the favorite these days among the companies collecting the cash. “Repayable contribution” rolls off the tongues of bureaucrats doling it out. As for the politicians, any term that does not sound like a synonym for “handout” is fine. They are all talking, though, about the same thing: taxpayers’ money flowing to the private sector. The Liberals took power vowing to all but outlaw the practice. “It is our view that protecting and subsidizing business is almost always the wrong way to go,” Finance Minister Paul Martin declared in a major speech outlining his economic strategy in the fall of 1994. Yet four years later, Ottawa continues to funnel hundreds of millions annually to business. And now, the pressure is building for the government to up the ante again in next year’s budget.

Business subsidies could be the sleeper issue in the fierce debate over how to allocate Martin’s so-called fiscal dividend—the money available for new spending and tax

cuts now that the federal deficit has been eliminated. Martin has warned that he will not have much to divide up in his next budget, likely to be brought down in February. He is publicly resisting demands for deep cuts to Employment Insurance premiums, and privately fending off a raft of spending proposals from fellow cabinet ministers. Boosting business support while denying so many other causes would be controver-

sial. Still, it remains a very live option.

One of Ottawa’s best-connected lobby groups, the Aerospace Industries Association of Canada, is leading the charge for a fresh infusion of $150 million into Technology Partnerships Canada, a fund set up in 1996 to support companies such as Montreal’s Bombardier Inc. and Toronto’s Spar Aerospace Ltd. That would be on top of the $250 million a year already earmarked for TPC. The industry has a powerful ally in cabinet, Industry Minister John Manley. “There is no question that support from government in the aerospace sector is the international norm,” Manley told Maclean’s. “It’s one of

the reasons I proposed TPC in the first place; it’s one of the reasons I’ve advocated for increasing its budget.”

Pumping more money into TPC, the flagship federal program to bankroll technology-oriented companies, would almost certainly put the subsidy issue back in the crosshairs of the Reform party. The official Opposition, spurred by critical research from the right-leaning Canadian Taxpayers Federation, repeatedly targeted TPC in salvos against “corporate welfare” fired across the floor of the House earlier this year. But TPC is only the most prominent piece of a more complex subsidies puzzle. Back in his landmark 1995 budget, Martin set out to slash an array of major business subsidies across the entire government by 60 per cent, to about $1.5 billion in 1997-1998 from about $3.8 billion in 1994-1995. While the final figures for 1997-1998, the fiscal year that ended last March 31, will not be released until late next month, it is far from clear whether the government has achieved that ambitious four-year goal.

A tracking of business subsidies by finance department officials for the first three years of the Liberal bid to scale them back shows spotty progress. From 1994-

1995 to 1996-1997, overall subsidies declined just 17 per cent. But the cut is much deeper, officials contend, when special items, such as lump-sum payments to farmers as compensation for the elimination of the grain transportation subsidy, are taken out. Subsidies in agriculture and energy certainly have been sharply curtailed. Still, reductions in some other key areas have fallen far short of Martin’s 1995 blueprint. Subsidies for “industry, innovation and market development,” which the government had aimed to cut nearly in half, fell by only about a quarter. And subsidies for cultural industry companies, mainly television and film producers, which were to have dropped by about a third, according to the 1995 budget, in fact soared 70 per cent.

Exactly what should be counted as a subsidy is itself a contentious question. Much of the government’s support for business is repayable—from lending under the Small Business Loans Act to much of the money that flows through regional development agencies.1 The aim is for federal agencies to offer much more favorable, flexible terms than banks or venture capitalist companies would allow. But critics argue that, at least when it comes to the big aerospace and defence companies, Ottawa’s record for ^ recouping taxpayers’ invest| ments, even under generous « terms, is abysmal. Last spring, jj= the Canadian Taxpayers Federation grabbed headlines by releasing a damning two-volume report analyzing Industry Canada’s subsidies from 1982 to 1997. Among the findings: the department had recovered just 15 per cent of more than $3.2 billion in contributions, mainly to defence and aerospace firms, that were supposed to have been repayable.

Manley dismisses such criticism as outdated. The attacks are focused mainly on lax policies the government has long since overhauled, he says. Early in their first term, the Liberals cancelled the old Defence Industry Productivity Program. Money distributed under DIPP to support research and development was, usually, supposed to be paid back when the resulting aviation and defence technologies began earning profits. But Manley and his officials readily admit those conditions were hard to enforce—as the taxpayers federation study found. One case of Ottawa’s frustration in trying to get paid back was exposed in court documents last year. Spar Aerospace took the unusual step of going to the Federal Court of Canada to challenge Industry Canada’s

assessment that the company owed the government $845,000 from the sale of DIPPsupported satellite technology. The dispute eventually was settled out of court in a confidential agreement. And Spar is back in good standing in Ottawa: last month, the company was awarded a TPC funding injection of $4.8 million.

When TPC was launched in 1996—after intense lobbying by aerospace companies for a reliable stream of funding to replace DIPP—the repayment rules were made much stricter, Manley insists. Every deal is different, but industry officials say a typical

TPC contribution to a big aerospace corporation to develop promising technology requires the company to pay the government back at a rate about the same as if Ottawa had put the money in the bank at five-per-cent interest. (For riskier technologies, such as genetic engineering, TPC seeks a higher rate of return.) The returns flow back only if the project pays off, and even then very slowly. Michel Lord, Bombardier’s vice-president of communications, said for an airplane developed with federal support, his company would typically begin sending Ottawa royalty cheques only after it has sold 200 aircraft, about the breakeven point. Royalties could continue for up to a decade.

So far, TPC has committed about $600 million to projects in which companies promised to invest $2.4 billion of their own money. Of that amount, 52 per cent has gone to companies based in Quebec, 31 per cent to Ontario, 13 per cent to the West and two per cent to firms in the Atlantic provinces. About two-thirds of the money goes to the aerospace sector, which is heavily concen-

trated in Quebec and Ontario—making the program an obvious target for the westernbased Reform party. Other sectors eligible for support, from alternative energy to biotechnology, tend to be spread more evenly across Canada.

Critics argue that since the details of each TPC investment are kept secret, in the name of commercial confidentiality, the public has no way of knowing the real chances of Ottawa getting its money back. “Lack of transparency is the major problem,” says York University economist Fred Lazar, who has studied federal research and development programs. “We just don’t know the terms and conditions, and I suspect in most cases they are not favorable to the government.” Even the Reform party, which in the past has been staunchly opposed in principle to business subsidies, hints it might be more sympathetic if the repayment schemes were open to scrutiny. “A lot of taxpayers would say they are not opposed to some of this stuff because it helps to develop some industries that are difficult to develop without government help,” said Reform industry critic Rahim Jaffer. “But why don’t we see what’s happening? Once these companies start making millions of dollars, we have to be able to see that they are paying this money back.”

Critics say that Ottawa’s record for recouping taxpayers’ investments is abysmal

The aerospace lobby insists there is no cause to quibble over TPC rules. Peter Smith, president of the Aerospace Industries Association of Canada, says the sector’s sales doubled in the past decade to $13.4 billion in 1997,80 per cent from exports, supporting 64,000 well-paid workers—ample reason to keep up support. But that strong growth could mask weaknesses. The Canadian content of the industry’s output has fallen to 54 per cent of the value of all aerospace products this year, from 66 per cent in 1995. That reflects, for example, the fact that the wings on Bombardier’s new Global Express jet are made in Japan. Manley says halting the disturbing decline in that Canadian valueadded portion is crucial—and requires government funding to compete with the support offered in rival countries.

But Manley concedes he has a tough job ahead in pitching for TPC funding against, say, social programs—a juxtaposition he argues misses the point. “If we don’t have successful companies,” he said, “then we’re not generating the tax revenues that enable us to put money into health care.” In the intense competition for scarce new resources in the next budget, making that connection may be one of the hardest sells around the federal cabinet table. □