Ontario's Progressive Conservative government will give at least $500 million to Volkswagen to build a battery plant in the province, and spend hundreds of millions more to beef up the area around the factory.
Friday's announcement comes on the heels of news that the federal government's forking over up to $13 billion to the German automaker for capital costs and production subsidies.
Federal production credits could range from $8 to $13 billion depending on production levels, according to the press release. They also phase out by 25 percentage points every year beginning in 2030, and will be cut entirely by 2032. If the U.S. Inflation Reduction Act, which the Volkswagen subsidies are responding to, is changed in any way, the "agreement also has the flexibility to be adjusted," the release said.
The plant will create up to 3,000 direct jobs and up to 30,000 indirect jobs, according to the provincial government, and produce up to one million batteries per year. It'll be part of a larger industrial area, which the province will pay to develop.
That'll include spending on roads, railways, water, electricity, and public safety. The plant itself will be around 370 acres within the larger 1,500 acre area. Shovels will go into the ground in 2024 and production will start in 2027.
Volkswagen needs to build the $7 billion plant before it gets any taxpayer money, said federal Industry Minister François-Philippe Champagne. Then the production credits kick in "if and when" the company starts selling the batteries, he said. Assuming those conditions are met, taxpayers will be on the hook for 10 years, he added.
The plant is expected to generate around $270 million in annual tax revenue, Premier Doug Ford said.
Prime Minister Justin Trudeau and Champagne both said they expect public funds to be recouped in five years.
"We're expecting the economic impact of investment to be covered within five years," Trudeau said.
Frank Blome, CEO of PowerCo SE, Volkswagen's battery manufacturing subsidiary, lived up to his name when talking about the viability of continuous government subsidies.
"Of course, this is not sustainable," Blome said, when asked about the subsidies benefiting his company. He also mentioned the skilled labour force and being "welcome" in the province and country.
Ford and Trudeau — plus several federal and provincial ministers — were in St. Thomas on Friday, where the new factory will be built.
Trudeau acknowledged the sky-high costs to the public purse. It was necessary, he said, because other governments are doing the same.
"We put up a lot of money, money that's going to come back in investments and economic activity very quickly," Trudeau said. "We had to put a lot of money on the table to show Volkswagen we were serious," he added.
Some experts questioned whether the huge outlay of taxpayer money was worth it.
On a macro level, economists hate these kinds of subsidies because they distort the market by picking winners and losers, said Rob Gillezeau, an economics professor at the the University of Toronto.
"In the real world, there's competition between geographies," Gillezeau said, and it could make sense to use public dollars to lure companies to Canada and Ontario.
"In this case, the number is just staggering," he said. With upwards of $13 billion potentially on the table, the 3,000 direct and 30,000 indirect jobs came at too high a cost for him. Gillezeau also said he doubts the government's economic impact calculations.
"Even if we give government the benefit of the doubt on those figures, we're looking at $400,000-and-change per worker, including the indirect jobs. There's no way that that's going to pass the cost-benefit test," he said.
One of the main reasons he's skeptical of the jobs figures is these jobs are going to draw on an existing labour pool in the area. Unemployment in the province is hovering around five per cent, and in St. Thomas, near London, it's about the same, according to Statistics Canada. Since there's not a ton of people looking for jobs, the ones created with this plant won't be new, so much as drawing from existing labour pools which will create vacancies elsewhere, he said.
If all Ontario had to do was put up $500 million of its own money, however, Gillezeau is a fan. For folks in southwestern Ontario, specifically those in the St. Thomas area and those involved in auto manufacturing and along the supply chain, it's a pretty big win, he said.
If there's another motivation behind the deal that's harder to quantify, like one based on national security or sovereignty, that could also help justify the deal, he said.
Brian Lewis, a fellow at the Munk School of Global Affairs and Public Policy and former chief economist in Ontario's finance department, understands why the deal happened despite it being offside basic economic principles.
The "auto-manufacturing sector is still an important sector in the province. Not as important as it used to be, but still an important sector especially in some specific regions of the province," he said.
"The recognition that the sector was going to need to totally retool, or significantly retool, for electric vehicles was a threat to the sector in the province. To be able to buttress that and support the jobs and the GDP that come with that, it's an economically sensible thing to do," he said.
One factor making it hard for Lewis to fully evaluate the deal is there's no way of knowing whether the plant would've been built here independent of the subsidies, or with a lower price tag, he said.
Earlier this year, the PC government passed a bill to amalgamate land in Central Elgin and St. Thomas. The bill carved out hundreds of acres of land from Central Elgin and combined it with St. Thomas.
Bill 63 caused a bit of a stir in the community. It sped through passage, with opposition parties opting not to vote against it. Central Elgin’s Mayor Andrew Sloan, however, said in a statement when it was introduced that the amount of land taken out of his municipality caught him “completely off guard.” Only when it was introduced on Feb. 22 did Sloan “(learn) for the first time that this bill was actually going to be 1,500 acres."
“Seventy-five per cent of this land is in Central Elgin,” he said.
Economic Development Minister Vic Fedeli said during third reading debate of Bill 63 that “the window of opportunity to secure transformational electric vehicle (EV) sites is only open for a short time.”
“Right now, all around the world, everybody is jockeying for position to make sure they’re near critical minerals or to make sure they’re near a workforce, to make sure they can go into a low-cost jurisdiction, to make sure they can go into a jurisdiction that has an auto ecosystem,” Fedeli continued on Feb. 27. “All of those are in Ontario.”
—With files from Charlie Pinkerton
