Charest’s Liberal government axes high-tech business subsidies, cuts funding to provincial granting councils

The dismantling of Quebec’s ambitious S&T agenda has begun. The June 12 Budget by the new Liberal government of Jean Charest has taken direct aim at the majority of tax incentives designed to encourage private sector innovation. In his inaugural June 12 Budget speech, Finance minister Yves Seguin announced “major turnaround measures” designed to foster entrepreneurial spirit in the province “through better-targeted government intervention in the economy”.

The dramatic ideological shift from state interventionism to laissez-faire capitalism was signalled June 5 in Charest’s address to open the province’s 37th legislature. The new majority government is already being compared to Ontario’s Mike Harris regime of the mid-1990s and British Columbia’s Liberal government led by Gordon Campbell.

Many tax incentives are being eliminated altogether while others, including the province’s flagship R&D tax credit, are being reduced. All S&T measures introduced in the pre-election Budget of the former Parti Quebecois administration have been cancelled (R$, March 31/03). That includes the Biotechnology Development Fund, which was aimed directly at helping struggling biotech companies move their products into the proof-of-concept phase. Also eliminated for at least one year is the Bio-Levier loan program, prompting many to predict the death knell of the sector as a viable component of Quebec’s emerging knowledge-based economy.

“It’s a new game. This Budget is from people who think that less is best, but it’s dubious where S&T is concerned,” says Dr Camille Limoges, architect of the province’s S&T policy and a former DM in the old Ministry of Research, Science and Technology. “There is not a single financial measure to be found in support of S&T. All the measures are cuts.”

Although S&T received the brunt of the cuts, the austerity measures were ostensibly implemented to deal with a projected (and hotly debated) $4.3-billion budget shortfall for FY03-04, and tackle a rising provincial debt blamed on the previous government’s practice of borrowing to finance capital expenditures and public corporations. The most obvious targets are the designated geographical sites providing tax incentives for a host of S&T sectors including multimedia, e-commerce, optics, biotechnology, nutraceuticals and information technology. Contracts for existing tenants will be honoured but no new eligibility certificates will be issued, for a projected savings of $114 million annually.

Lowering the provincial R&D tax credit by 12.5% will yield a full-year saving of $63 million. The rate for smaller businesses drops from 40% to 35% on salaries and research contracts, while the big business rate has been cut from 20% to 17.5%. In spite of the cut, Quebec’s R&D environment remains extremely favourable compared to other provinces. The net cost of $1,000 in R&D spending for smaller businesses is $198 (up from $174) while the national average is $289. The cost to large businesses is $390 (up from $378), compared to a national average of $387.

Budget documents note that tax credits for R&D and culture are being reduced at half the rate of other surviving tax assistance mechanisms. All those left standing are being cut by 25% “to allow the government to examine their scope and effectiveness more thoroughly”. They include tax credits for biotechnology development centres, technology adaptation services and tax holidays for qualifying foreign employees.

PROVINCIAL GRANTING COUNCILS HIT

Cuts have also been made to the provincial granting councils, which now fall within the newly created Ministry of Economic and Regional Development (MERD). The modest 1.85% cut delivered in Pauline Marois’ pre-election Budget has been deepened a further 5%, resulting in a combined decrease of $10.8 million.Their combined budgets now stand at $148.6 million.

MERD’s budget remains roughly equivalent to last year at $238.2 million because of an $11-million increase to the budget of Genome Quebec to finance the province’s share of projects awarded during the second competition.

“The granting councils consider (the cuts) awful but it could have been much worse,” says Michele Fortin, MERD’s associate DM for research, science and technology. “But the cuts in some of the major locations (designated sites) may hurt more. It won’t effect the companies that are already located there but it will kill a lot of dreams.”

Fortin agrees that the cuts included in this year’s Budget could be just the beginning, since there was only one month to build the Budget following the Liberal electoral victory. All programs and assistance to the regions are now under scrutiny and further cuts may be made in the coming months. One decision left hanging is the province’s matching fund for projects awarded by the Canada Foundation for Innovation. A decision will be required in the next Budget to support the next round of projects.

“We’re entering an era where we will have to demonstrate much more forcefully what we’re doing. Let’s hope it’s a transition phase,” she says. “It could actually lead to more collaboration with the federal government and internationally if we want to go into certain strategic areas.”

Why the Budget singled out S&T for much of its cost reduction has perplexed many observers, although it reflects the importance the previous administration placed on the new economy and innovation.

“Even during the financial crisis of the 1990s, there was always something new for S&T,” says Limoges, who retired last year after a long career in government and academia (R$, June 7/02). “I wonder how this can mean something positive. The situation is not good and the question is how bad it will get. There is nothing in the Budget to show that the government is implementing the province’s science policy and there is a lot more to implement.”

Limoges says the Liberal administration’s decision to stop issuing certificates for the province’s 12 designated sites is somewhat more understandable, given their high cost and undemonstrated value. But he questions the rationale of the decision since he is unaware of any financial impact studies.

“I’ve never seen any studies of fiscal measures or program studies,” he says. “I doubt if the Liberal government has any in hand. The decisions taken will be very rough for the emerging biotechnology industry.”

BIOTECH HIT HARD

Quebec’s biotech sector is the largest in Canada and has been carefully nurtured through a combination of university research and commercialization and tax measures. With the high-tech downturn, however, new measures were introduced including the Bio-Levier loan capitalization program (R$, April 3/02) and most recently the Biotechnology Development Fund (BDF). With the cancellation of both, the rash of bankruptcies and mergers and acquisitions will likely accelerate.

Perry Niro, BIOQuebec’s executive director, says the combinations of cancelled measures directed towards biotech is cause for concern. But he notes that Quebec’s R&D tax environment is still competitive.

“We don’t have all the information on impact, but it’s possible for Quebec companies to increase their federal R&D tax credits (because of the provincial reduction),” he says. “A 35% R&D tax credit for small biotech companies is still pretty good.”

As for the cancellation of the BDF, BIOQuebec is still weighing its options going forward. “We need to prepare other proposals for the Liberal government. They’ve launched a consultation for this fall and we will be involved.”

Such cautious optimism fails to convince Limoges that the Liberal government isn’t committing a serious misstep by haphazardly tampering with the provincial innovation system. While he’s pleased that research, science and technology remain distinct entities within the new Ministry, he fears that the long years of work to push innovation to the forefront of government policy may be coming to an end.

“This Budget is a step backward,” he says. “Some cuts are so significant that people who manage S&T are reacting like they have been stabbed.”

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