Business In Quebec Is Voting With Its Feet

As fears of sovereignty rise, companies may cut back-or flee

Just a few months ago, Jack Kivenko had ambitious expansion plans for his family's Montreal-based Jack Spratt Manufacturing Inc., which makes jeans for the Canadian market. But with the Quebec separatist movement on a seemingly unstoppable roll, those plans have been canceled. It's a common tale for the hundreds of clothing manufacturers that make Montreal Canada's rag-trade capital. "There's so much political uncertainty," says Kivenko with a sigh, "that I can't imagine anyone investing long-term dollars."

Such pessimism is running rampant as the ruling Parti Quebecois prepares to install Lucien Bouchard as Quebec's Premier on Jan. 29. No wonder. Bouchard came within a hair of leading the separatists to victory in the Oct. 30 sovereignty referendum. Now that he's ascending to the French-speaking province's top job, many executives fear sovereignty is all but inevitable. "We are fighting what seems to be a losing battle," says Brian Neysmith, president of Canadian Bond Rating Service. Polls show support for independence has surged to 55%, up from 49.4% in October. "There is a real possibility that Quebec will be a sovereign country before 2000," Neysmith predicts.

Although Canadian federalists contend that it's too early to write off a united Canada, the growing possibility of sovereignty is hurting the Quebec economy. The province has underperformed Canada for two consecutive years. Last year, Quebec grew just 1.6%, down from 3.9% in 1994, the National Bank of Canada says.

As the gloom mounts, Quebec's housing industry has ground to a virtual standstill, as well. With fears growing that sovereignty would prompt an exodus of companies and individuals, housing starts there fell 43% in 1995, to 8,000, the lowest level since record-keeping began in 1965.

Business leaders fear this is just a taste of the bitter medicine to come. A new survey by the Conseil du Patronat, which represents Quebec's largest companies, reports that only 33% of Quebec executives feel economic conditions are "good or very good," down from 63% a year ago. "We have to accept the true seriousness of the risks we are running," argues Bank of Montreal Chairman Matthew W. Barrett. He predicts that a breakup of Canada would depress Quebec's economy by 7% "in the first year alone" and cost Canada up to $150 billion of lost growth over five years.

Indeed, companies are already gearing up contingency plans. Canadian Pacific Ltd. has announced plans to move the headquarters of its CP Rail System unit from Montreal to Calgary. Although CP argued it was following its customers to western Canada, the move sent shivers through corporate Montreal. Bank of Montreal is also warning that it may move its head office out of Quebec if the province splits with Canada.

PLUNGING CONFIDENCE. Other companies chartered to do business in Canada, such as Air Canada Inc. and telecommunications giant BCE Inc., could follow. "You name me a company with pan-Canadian or North American interests now headquartered in Montreal," says Gordon Ritchie, chief executive of Ottawa-based trade consultants Strategico Inc., "and you've named a company looking at moving out."

Even companies such as General Motors Corp., which produces its entire output of Chevrolet Camaros and Pontiac Firebirds at its plant in Sainte Therese, Que., face uncertainty. No one knows how quickly an independent Quebec would be admitted to the North American Free Trade Agreement. "It would complicate our lives tremendously if we didn't have the free-trade agreement to ship duty-free into the U.S. and Mexico," warned GM of Canada President Maureen Kempston Darkes at the Montreal auto show on Jan. 9.

Such plunging business confidence has already caught Bouchard's attention. To buck up trust, he's promising his first priority will be a "vigorous housecleaning" of Quebec's bloated public sector. That's long overdue. Quebec's total debt burden is higher than that of any province except depressed Newfoundland, and Quebec is the only province that has yet to vigorously attack its deficit, now $3 billion. Bouchard also pledges to delay another referendum, probably until next year.

But these measures don't address the fundamental problem: Bouchard's goal is to make Quebec a sovereign country. And he'll take office with a lofty 67% popularity rating, "the highest ever recorded" for a Quebec Premier, says pollster Jean-Marc Leger. No wonder business is hedging its bets.

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