Bombardier’s $1-billion trade secret

The Ottawa Citizen
March 18, 2000

How Canada’s hidden loan to Amtrak sealed deal for Quebec firm; Export Development Corp. bailed out U.S. giant while Liberals slashed VIA Rail funding

The federal Export Development Corporation secretly lent $1 billion to the deficit-plagued U.S. railroad agency Amtrak while the Chretien government sharply cut passenger rail funding in Canada.

The money allowed the U.S. government-owned Amtrak to sidestep a Congressional cap on capital grants, and gave Montreal-based Bombardier Corporation an undisclosed edge over rival bids to build Amtrak’s $2.6-billion U.S. “Acela Express” high-speed train.

Since 1993, the Chretien government has cut annual VIA Rail funding from $348 million to $178 million.

Bombardier and its French partner, GEC-Alsthom, were picked by Amtrak to build the Boston-Washington bullet train in 1996. The premier showcase for advanced train technology in the United States, the Acela Express is slated to be in full service later this year.

The EDC-Amtrak deal violated the spirit — if not the letter — of international trade laws. By secretly backing Bombardier’s bid, the Canadian government virtually guaranteed Bombardier would triumph over rival bids from Germany-based Siemens and Sweden-based Asea Brown Boveri.

The loan package has been a closely guarded secret.

The amount owing climbed from $690 million to $1 billion as of the end of 1998. Officials from Bombardier and Amtrak declined to disclose details about the deal.

Details of the EDC/Amtrak loans are not disclosed in EDC annual reports or financial statements. When the Citizen requested details in February, EDC public affairs spokesman Rod Giles wrote in reply:

“Unfortunately, due to confidentiality agreements with the parties involved, I am unable to identify the entity, the purpose of the loan, the Canadian suppliers, or the status of the loan.”

It was the EDC itself which had the confidentiality agreement with Amtrak.

This week, EDC vice-president Eric Siegel confirmed that the $1 billion involves a package of loans backing Bombardier’s bids to obtain orders to supply rail equipment in the United States. Most of that money is linked to Amtrak’s Acela Express.

“It’s a series of loans that go back to about the middle of the 1980s, to Amtrak. It is in respect of the supply of train sets and cars primarily by Bombardier, and locomotives by General Motors,” Mr. Siegel says.

Asked why the EDC had earlier refused to provide the details, Mr. Siegel told the Citizen the EDC press officer had been “out of the loop” on the issue.

He added that Amtrak has maintained interest payments due on the $1-billion loan package, and the loans are not in default.

Mr. Siegel said the EDC makes an accounting provision on all loans for defaults, but did not estimate what portion of the $1 billion may not be recovered. The EDC will not disclose the interest rates, repayment time-lines, or principal amount owing.

Amtrak concluded the 1996 deal when it was starved for capital funds and the Republican-controlled U.S. Congress would not approve the Amtrak funding requests, which were backed by President Bill Clinton.

The federal agency, which has run large deficits for decades, received a $2.2-billion U.S. capital grant in 1997, and it has pressed for $2 billion more.

That’s when Canadian taxpayers unwittingly came to the rescue, via the EDC.

“We’ve always suspected that the success of Bombardier wasn’t so much due to the managerial efficiency of the company, but in its lobbying talents to obtain government support,” says Kristian Palda, professor emeritus of economics at the Queen’s University School of Business. He is a noted opponent of government subsidies and secretive practices.

“If the wealthiest country in the world, in its budget proceedings, chooses to make that (financial) risk assumption about one of its own governmental corporations, then it is perfectly scandalous for Canadians to enter this field on the back of its own taxpayers.”

The Acela Express project had political support from several U.S. governors, Mr. Clinton, passenger rail enthusiasts, and environmental groups anxious to cut smog emissions in the Boston-Washington corridor.

Amtrak is currently spending more than $50 million U.S. promoting the electrified trains as a sleek, sophisticated alternative to car and plane travel. They are designed to reach speeds of 265 km/h. Amtrak hopes to earn $200 million U.S. per year once all 18 trains are running.

So far, the U.S. rail agency’s marketing is moving faster than the trains.

Full service of the Acela Express has been delayed months while Bombardier and GEC Alsthom try to solve excessive wheel wear problems.

The consortium is facing stiff penalties — up to $13,500 U.S. per day per train — for not delivering the trains on time.

Amtrak is also facing an ominous political deadline. After decades of subsidies, the U.S. Congress passed a 1997 law giving the federal railroad until 2002 to become financially self-sustaining. The $1-billion EDC loan package has helped Amtrak avert a capital crunch, but repaying it may be in jeopardy if Amtrak fails to attain break-even finances.

Amtrak officials were not shy about pitching the political benefits of the Acela Express project during the 1996 tender process. At the time, the federal agency was bound by an “America First” policy for government procurement. It called for a minimum 70-per-cent, made-in-America content.

When the bid was awarded to Bombardier, Amtrak officials stated that most of the job-intensive work on the Acela Express would occur at Bombardier-owned production plants in Barre, Vermont, and Plattsburgh, New York.

Categories: EDC, Export Credit, News, Secrecy

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