Despite decades of subsidies by Canadian taxpayers, Bombardier Inc. continues to be mired in a financial crisis jeopardizing its future.
The latest humiliation came as the company had to sell its train-making division to pay off a substantial amount of debt due this year. Once a proud symbol of Canadian entrepreneurship, it now is the hallmark of pork-barrel cronyism.
On Feb. 17, the French multinational Alstom signed an agreement to purchase Bombardier Transportation for a reported range between $8.4 billion and $9 billion. The deal, pending approval with European regulators, would result in net proceeds of $4.5 billion for the troubled Canadian company.
The Wall Street Journal reports Bombardier was also in talks with U.S.-based Textron over a potential sale of its business jet division. However, negotiations apparently fell through and Bombardier will become solely a business-jet manufacturer. This marks the dramatic shrinking of a conglomerate that used to be involved in everything from snowmobiles to real-estate finance.
The sweet venom of subsidies
A key element of Bombardier’s downfall has been subsidies. The company has been receiving government help for decades. Between 1996 and 2018, Bombardier received $4 billion in subsidies. In 2015, the Quebec government disbursed $1 billion to own 49.5 percent of a new joint venture in charge of the C Series passenger jets. The federal government added another $372.5 million for research and development of business jets and the delayed C Series program.
The handout led Boeing to complain to the U.S. government. It alleged Bombardier sold jets to Delta Airlines at a price so low it could not have done so without taxpayer help. The U.S. Commerce Department agreed and began the process of slapping a tariff of 299.5 percent on the jets.
The onerous burden was too much for Bombardier, which decided to give away half of its commercial air division to Airbus for no cash at all. Bombardier eventually sold its remaining stake to Airbus. The deal is hardly a good return on their money for Canadian taxpayers.
In addition to direct subsidies, the federal government has given aid to Bombardier in other ways. The Quebec company is one of the largest clients of Export Development Canada (EDC), a lending company owned by the federal government that helps Canadian exporters with trade finance. Aerospace accounts make up around 15 percent of the EDC’s portfolio.
The death blow of cronyism
This sad state of affairs is the result of bureaucrats taking money from working-class Canadians to prop up a politically-connected company. Funds that could have paid for other essential public services, reduced deficits or lessened the burden on taxpayers have instead burned like jet fuel.
When subsidies enter the equation, business decisions align not with the best interests of consumers. Instead, they align with the best interests of the government and its cronies. For example, Patrick Pichette has sat on both the board of Bombardier and the Pierre Elliott Trudeau Foundation. In addition, Bombardier has faced bribery scandals in at least four countries.
The larger problem with Bombardier was that it took on too many projects it couldn’t properly handle. It was able to afford that because it could count on bailouts and other forms of government support its competitors didn’t enjoy. As a result, the company was doing lots of things and not doing them well.
Having to answer to the government isn’t the same as being accountable to profit-seeking shareholders. The company became a money pit as cash flows turned negative and debts piled on.
Even now, Bombardier is likely not making the best decisions for investors. The Wall Street Journal’s Jon Sindreu suggests the best-case scenario for Bombardier was an exit from the aerospace business and a focus on trains. The reason is the business-jet company has been losing market share and is subject to environmental concerns and economic recessions. In addition, Bombardier needs to make major investments to catch up to the service networks of competitors.
The market is the solution
Ironically, the sale of the rail division shows the solution to Bombardier’s problems has always been in the marketplace. One of the rationales offered for government support of Bombardier is the importance of domestic manufacturing.
However, France-based Alstom has pledged to continue manufacturing in Quebec, and to open a design centre and a North American headquarters. Instead of threatening domestic manufacturing, the multinational is going to use existing factories to expand its customer base. This doesn’t involve spending more taxpayer money.
Instead of picking winners and losers, federal and provincial governments should step back and let markets work. Not only would this cull the herd of inefficiency, it would result in fewer opportunities for corruption in the awarding of corporate welfare.
There’s also less moral hazard involved when companies realize they can’t depend on governments to bail them out of their bad business decisions. It forces companies to realize they can’t make the mistake of Bombardier: expand into too many operations while not performing them as well as their competitors.
Real market constraints lead them to focus on those things they can be profitable with instead of political considerations and bailout expectations.
Bombardier is the poster child: more government cronyism means business based on political patronage and not profitability. It provides incentives for foolish risk-taking and corruption. Most importantly, taxpayers lose when bureaucrats – not the market – pick winners and losers.
Fergus Hodgson is the executive editor of Econ Americas, a columnist with the Epoch Times and a research associate with Frontier Centre for Public Policy.