SADI loans Pratt & Whitney Canada $300M for new technology development

Ottawa's decision to support a $1-billion R&D program at Pratt & Whitney Canada (P&WC) to develop new engine technologies has reignited the perennial policy debate over government support for some of Canada's largest companies and corporate R&D players. The $300-million, interest-free, repayable investment will co-finance R&D to be undertaken at P&WC's headquarters in Longueuil QC and its Mississauga ON facility. The government estimates the work will create and maintain more than 700 jobs during the five-year R&D phase and another 2,000 positions during the 15-year benefits phase.

The investment through the Strategic Aerospace and Defence Initiative (SADI) is the program's largest to date and is the second largest federal investment in P&WC's history. In 2006, the firm received $350 million to support two major gas turbine R&D projects through Technology Partnerships Canada (TPC) — a precursor to SADI and a favourite target by the then Conservative opposition, which condemned the program as corporate welfare. P&WC has received more than $2 billion in federal R&D assistance since 1982 (R$, December 22/06).

Media reaction to the December 13th announcement ranged from standard reportage to stinging criticism. The latter included charges of corporate largess. P&WC has paid back only a fraction of previous government R&D loans, despite huge profits racked up by P&WC's parent, Hartford CT-based United Technologies Corp.

level playing field

Policy experts note, however, that Canada is not the only country to provide public support to its aerospace sector. Indeed, if federal assistance was not provided, Canada would be an anomaly amongst its major aerospace competitors.

"The Montreal aerospace industry is an area of national importance and there are spillovers we know will benefit the economy," says Adam Holbrook, associate director and adjunct professor at Simon Fraser Univ's Centre for Policy Research on Science and Technology. "Studies show that for every dollar in foregone tax revenue, between one and two dollars comes back as a benefit to society. The government will get more than $300 million back at the end of the day in terms of benefits and training that diffuses through the economy."

Supporting leading edge technologies that can make a company globally competitive also involves considerable risk, which many contend justifies public-private partnership. In P&WC's case, the SADI investment supports next-generation technology development in key areas. The company's $1-billion program involves R&D for:

*cutting-edge materials (composites and advanced alloys) to reduce engine weight;

* high-efficiency compressor technology to enhance engine performance and reduce fuel consumption;

* further development of the company's TALON combustion system to reduce engine emissions.

* technologies to reduce engine noise

* programs to "further eliminate materials of concern" from its manufacturing processes and products.

Despite the continued financial support of government, P&WC's R&D expenditures have declined in recent years from a high of $481 million in 2006 to $398 million in 2009. R&D intensity (R&D as a percentage of revenue) in those two years was roughly equal at about 13.5%, reflecting a decline in sales from $3.3 billion in 2006 to $3 billion in 2009. Holbrook says he's not surprised given the severity of the economic downturn.

"Most large companies cut back on R&D between 2008 and 2010 and the aerospace sector is cyclical," he says. "SADI is a safe policy instrument and it has good economic return but it still begs the question: what is our overall strategy in the manufacturing sector? For automotive the support is questionable but aerospace has two advantages. It's producing new technologies, not more of the same, and there's also the human capital. That's very valuable but hard to quantify."

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