Canada can create New Economy jobs without subsidizing foreign corporate shareholders in the process

News Report: New Volkswagen EV battery plant in Ontario to create 3,000 jobs

When you have an office in Langevin Block (as the “Prime Minister’s Office” on Wellington Street was long known as), you see the stars – as well as the dogs – of the Canadian corporate sector.  Invariably, the reason why a file is on your desk is because there’s either a problem to solve, jobs to save/create, and/or a big government cheque to cut.

Back in 1992, I recall names such as Curragh Resources fitting that bill.  There was some huge zinc mine in the Yukon to develop, and the combination of federal environmental permits and ongoing financial risk meant that the file made its way to then-PM Mulroney’s team for attention.

As a Toronto Stock Exchange-listed company, Curragh had access to both equity investors and bank lenders.  But that doesn’t mean that the company’s senior executives and some local politicians weren’t looking to both the Yukon Territory and Ottawa for some form of a subsidy to keep the mine in production.  Call it a “bailout,” call it “risk capital,” call it “regional economic stimulus,” call it an “support for essential mineral development;” there was a fair argument that the miners would be hard-pressed to find other employment in the event that the mine couldn’t continue to operate.  

Like every corporate file where worker’s lives are involved, there’s always an argument in favour of a huge government cheque.  Regardless of your political persuasion.  Curragh went bankrupt in 1993, and the 1992 Westray mine disaster – which killed 26 coal miners at Curragh’s Nova Scotia subsidiary – certainly factored into the firm’s financial collapse.  My recollection was that Yukon was prepared to lend the company $5 million to stay in operation, but we didn’t have confidence that the mine would survive even if the Feds cut a cheque. Moreover, it’s possible that some in the PMO weren’t fans of the idea that taxpayers should be on the hook for corporate failings.

These decisions aren’t easy, whether your answer is going to be “yes” or “no.” That’s life in “River City,” as Dr. Hugh Segal, OC, OOnt, CD used to say.

Those faint memories flowed back this week on the heels of Ottawa’s $13 billion battery plant commitment. I get why the Grits loved the idea — it fits perfectly with their Green Economy 2023 budget narrative. They get to claim that they’re doing something for the environment, even if those same EV batteries would have been manufactured somewhere else in the absence of a Canadian subsidy deal. The location of a plant that’s going to be built anyway doesn’t do a thing to reduce the amount of carbon released into the atmosphere in any given year. As photo ops go, however, it would have been a 5-star opportunity.

Having spent the last 30 years looking at business plans and financial statements, it’s hard to pass judgment on the merits of the Volkswagen deal in the absence of the gory details.  Taxpayers have a sense of the headline pitch, but that’s about it.  Others have weighed-in, such as Andrew Evans at the Hub, with a compelling argument that “Giving Volkswagen billions in subsidies was a short-sighted, unsustainable mistake”:

It’s also not obvious that the economic upsides are worth the costs. Electric vehicle manufacturing isn’t the same as traditional automobile production. Electric vehicles require less than half of the workforce to build as traditional internal combustion engine autos, need much fewer parts (reducing employment by downstream suppliers like Magna) and assembly is required to be physically located close to battery plants which reduces incentives for trade across long distances. According to the U.S.-based Economic Policy Institute, barring massive investment in onshoring battery plants, there are likely to be massive job losses in the auto sector, even if traditional production is fully replaced by EV manufacturing plants. 

As every politician in Ontario and Quebec well knows, the Auto Pact has been a key economic driver for many ridings since the agreement was signed in 1965.  According to the Canadian Museum of History, the Pact made it possible for Canada to double its share in the Canadian-.U.S. automotive industry while lowering car prices for consumers.

With that backdrop, one can sympathize why politicians of all stripes would want to position Canada for whatever the auto and truck industry will look like in the decades to come.  Although I’m a fan of the range of traditional combustion engines, Canadians can’t ignore that the European Parliament has approved a new law banning the sale of “petrol and diesel cars” starting in 2035.

Does that mean we should enhance Volkswagen’s income statement by $13 billion?  Not necessarily, as Jack Mintz outlined for the fabulous Macdonald-Laurier Institute:

“End this destructive green subsidy war. The claim is that the money will make Canada a powerhouse in EV battery production, creating thousands of direct and indirect jobs. The prime minister predicts the project will pay for itself in five years. These ‘free lunch’ claims are pure fantasy. We are living through labour shortages and a rapidly aging workforce. Thousands of qualified workers are not milling around looking for jobs. VW will hire skilled workers from other sectors. As these other sectors face higher wage costs, they will cut back production and pay fewer taxes. In the end, the subsidy won’t pay for itself. It will simply displace production and jobs elsewhere in the economy.

Fans of the “Just Transition” might argue that the skilled workers VW will need will come from declining oil and gas sector. But shortages of oil and gas workers are common today and will be so in the future as the industry ramps up investments in carbon capture, utilization and sequestration and other subsidized energy transition projects.

Moreover, if workers are drawn from more productive sectors of the economy, the effect is actually to lower Canada’s GDP. The auto industry is not a massive income generator in Canada. Despite billions in subsidies given to the industry since the 2008 financial crisis to save companies from bankruptcy or improve their innovative performance, labour productivity has slipped. From an average $94 per working hour in the years 2012-2016, productivity was only $77 per hour in 2017-2021, falling behind many other sectors, such as mining, greenhouse crop production and electric power generation.

That is not all. Subsidies cost money. The taxes that finance them discourage work, risk-taking and investment.”

If you’re one of the 3,000 people who get (or don’t lose) a job that you might not otherwise enjoy, you likely won’t complain about this particular government program, despite the eye-popping subsidy.  To me, without seeing the details of the Volkswagen deal, it’s tough to be definitive.  But I am certain, however, that the private sector is more than capable of generating high-paying tech jobs without diverting $13 billion of tax dollars away from our hospitals, schools, critical infrastructure or our depleted military.

Over the course of my time leading Wellington Financial, we tracked the jobs that were created / preserved every time we closed a new growth capital financing.  We did it by sector, by city, by country, even by the venture capital fund that we partnered with.  Over our five different venture debt funds, we identified thousands of jobs that were supported by what amounted to almost $1 billion of private capital investment from our funds.

At one B.C.-based software company, for example, employment grew from 30 staff to more than 450 following our three different growth capital rounds.  Government can play a role via the existing SR&ED tax credit program, for example, but those are small dollars relative to what foreign-owned auto manufacturers are able to negotiate.  Or Ericsson, as I pointed out recently (see prior post “‘60 additional intern jobs’ is not an Innovation Strategy” April 18-23).  

There will be times when Federal government support makes sense, whether it be capital, a loan guarantee, or a basic technical regulatory change.  When I was Chairman of the Toronto Port Authority, all we needed was a simple regulatory amendment to be able to proceed with the privately-financed underwater pedestrian tunnel to Billy Bishop Toronto City Airport.  For Stephen Harper’s government, it wasn’t very complicated.  The TPA took on all of the financial risk and hassle of getting this job-creating infrastructure project launched, and we did it without a penny from the taxpayers.

For Canada’s innovation entrepreneurs, they’ll be the first to tell you that the lack of sufficient private growth capital, whether it be equity or debt, is often the only thing that undermines their ability to create hundreds of new, high-paying jobs.

Just think what Canadian entrepreneurs could do with their own modest share of $13 billion of direct investment in their clean tech, life science or IT start-up.  Canada would own the intellectual property, unlike with Volkswagen’s battery plant, and the wealth created by these successful companies would stay in Canada, supporting domestic investors, pension plans, local charities and the next generation of start-ups via the Angel investment networks that follow (as we saw courtesy of Shopify, for example). 

And, if you weren’t politically inclined to borrow $13 billion to generate 3,000 direct jobs, Wellington Financial was just one of many firms that have proven that private sector capital is certainly capable of creating plenty of new economy jobs, without relying on a single dollar of government grant funding. We need to have more confidence in Canada’s private sector.

MRM

(this post, like all blogs, is an Opinion Piece)

(photo #1: Tinker, 1950, by Irving Penn; photo #2 2012 via Canadian Press)