Metro deal’s economics stink, too

The Gazette

October 07th, 2010
By Jay Bryan

Forget for a moment about the ethics of Jean Charest giving a $1-billion-plus sweetheart deal to Bombardier Inc. in the hope of reaping political dividends.

Forget about the hypocrisy of his quest for free trade with Europe even as he stiff-arms a Spanish competitor out of bidding for a major metro equipment deal in Montreal.

For a moment, let’s pretend we don’t notice the stench of corruption rising from this transaction and just look at its economics. Many people are inclined to see them as pretty good. After all, a foreign firm gets the shaft while a local champion gets favoured treatment. Premier Charest claims that the contract will be worth 775 jobs in Quebec.

But there’s a reason such big contracts are usually subjected to competitive bidding, and it has nothing to do with protecting foreign competitors. It’s to protect taxpayers.

History has given us sadly abundant proof that, left to their own devices, politicians will nearly always use public money to benefit themselves.

This doesn’t have to be in the form of cash in plain envelopes. Sometimes, as in the case of the Bombardier deal, it’s indirect: bad for taxpayers, but politically helpful to the government, which happens to be facing a byelection in the riding where hundreds of Bombardier jobs are at stake.

There are varying estimates of how much waste is built into this contract, but the amounts all add up to hundreds of millions of dollars.

That wasted money represents the premium that taxpayers will have to pay over the price that competition would produce.

Karl Moore, a professor of business strategy at McGill University, says his best estimate is that we’ll wind up paying about half a million dollars too much for each of the 468 cars in the current contract.

And there’s more: another contract is in the offing since Montreal needs a total of about 1,000 new metro cars, and whoever gets the first contract is nearly certain to win the follow-up order.

Multiply half a million dollars by 1,000, notes Moore, and you’ve just diverted about $500 million from spending on health care, education or road repair into a delightful profit windfall for Bombardier shareholders.

Now that’s not to say that opinion on this is unanimous. You can find smart people in Quebec who go along with Charest’s reasoning that the existing metro equipment is so old that there’s just no time to spend on allowing competitive bids.

Given that getting the new cars into service is virtually an emergency, the decision to cut off bidding could be justifiable, believes economist Claude Montmarquette, president of CIRANO, a think tank focused on public policy.

But it’s not clear how big this emergency is. The Charest government tried to hand this deal to Bombardier five years ago, citing the need for speed.

Strangely enough, the system is still running and my colleague Henry Aubin reports that Montreal’s transit boss sees no problem keeping it going if bidding went ahead.

The big irony here is that even if it hadn’t been handed the deal on a silver platter, Bombardier probably would have won it -just at a lower price.

Bombardier, after all, is one of the world’s biggest makers of this kind of equipment. It wins contracts all over the world against tough competition, and it has lots of experience building cars for Montreal’s metro system.

So why cut off the bidding? Well, look who benefits. The Charest government gets to announce the job-creating contract right now, before the Kamouraska-Temiscouata byelection is announced. Bombardier gets to keep its price high. Really, it’s a win-win deal.

Well, okay. It’s a win-win-lose-lose deal when you factor in taxpayers and the metro riders who may eventually pay higher fares than they should.

Actually, it’s a loser of a deal in an even larger sense. Giving gifts to favoured companies just doesn’t pay off, points out James Milway, executive director of Toronto’s Institute for Competitiveness and Prosperity.

They’ll take the gift, but if it looks more attractive to produce in Mexico or China, the subsidized jobs will soon be gone.

Quebec would be much better off to invest across the board in boosting competitiveness, Milway said. A good starting point could be its universities, where underfunding makes it hard to expand, leaving the province’s business managers more poorly educated than in many other jurisdictions.

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