Article published in The Gazette, January 29, 2003
A Bombardier spokesman claims the loan guarantees that the company gets from the Quebec government have "absolutely no budgetary impact, none whatsoever" on the public treasury. If such free money does exist, why doesn't the government give loan guarantees to everybody? Why aren't the banks rushing to loan money to Bombardier? Why doesn't the Quebec premier himself, privately, give loan guarantees to Bombardier? In short, if Quebec bureaucrats are able to turn zero budgets into profits, why doesn't everybody get into this business?
The answer, of course, is that loan guarantees are not free. They carry a risk that Quebec taxpayers are forced to support.
And such risks do materialize. Last fiscal year, Investissement Québec (a state agency that grants loans, loan guarantees, and other subsidies) took $114 million in provision for losses. Reading through the opaque, grandiloquent, pidgin-economic jargon of the agency's annual report, one finds that its "net income" of $29 million includes contributions of about $200 million from the Quebec government. The Quebec taxpayer is paying real money to the agency that gives "free" loan guarantees to corporations such as Bombardier.
During the past six years, the agency has guaranteed nearly $1 billion of loans to Bombardier. This is a large proportion of the agency's operations: In the last fiscal year, loan guarantees granted by the agency totalled $598 million. Investissement Québec is now rumoured to be considering $3 billion of new guarantees to the aerospace manufacturer, whose credit rating has been downgraded by Moody's to two notches above junk status.
The argument that Bombardier never defaulted on its loan guarantees, and that therefore they cost nothing, is fallacious, as any Finance 101 student would know. Some loan guarantees do go sour: Investissement Québec shows $152 million in accumulated provision for losses on its loan guarantee portfolio of $598 million. Last year, it was some other company that defaulted; tomorrow, it might be Bombardier. But, the taxpayer is told, "gamble, or else." Investors are free to invest or not; taxpayers are forced to pay taxes.
What is the cost of the risk forced on Quebec taxpayers? One way to estimate this is to consider the risk premium that Bombardier would have to pay if it did not have the government's guarantee. Assuming that the recent Moody's downgrade adds one percentage point to the company's debt financing, $3 billion dollars would cost Quebec taxpayers $30 million. If we use the 7-per-cent premium risk that Investissement Québec used to apply to its operations, we get a cost of $210 million.
Quebec taxpayers would thus risk between $30 and $210 million by granting additional $3- billion loan guarantees to Bombardier, instead of putting their money in less risky ventures. This, of course, would be added to the $200 million per year that the government is already spending on Investissement Québec. Subsidy money does not come from heaven. Investissement Québec is a forced lottery.
The Bombardier case is representative of the so-called Quiet Revolution. The Quebec government is buying support with money taken, or money it is ready to take, from the coerced taxpayers. As for Bombardier, the company has gone from a free-market entrepreneurial venture to a golden lame duck and a high-class social welfare bum.