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By Allison Lampert and Kevin Dougherty
MONTREAL/QUEBEC CITY, Oct 30 (Reuters) - Quebec's $1 billion bailout for aerospace company Bombardier Inc is meant to protect thousands of jobs in one of the province's top industries, but risks worsening the finances of Canada's most indebted province if it fails.
The deal would give Quebec's Liberal-run government a 49.5 percent stake in Bombardier's troubled CSeries jet program, according to the announcement on Thursday, easing shareholder fears about the company's future but triggering an outcry from taxpayer advocates and opposition politicians.
"This is what we call corporate welfare," said Aaron Wudrick, the federal director of the Canadian Taxpayers Federation, adding the deal could lead to long-term costs for Quebec taxpayers if it fails.
The province, which has practically frozen money for social services and education as it tries to balance its budget in the current fiscal year, had a deficit of C$2.35 billion for the last year ended March 31. There is also public disenchantment following a wide-ranging corruption probe into the awarding of construction contracts.
But the fortunes of Quebec's aerospace sector are closely tied to those of Bombardier, a household name in the province. Its 18,000-strong workforce in Quebec is largely aerospace-focused and its presence in the province helps support many smaller part vendors and suppliers in the region.
The aerospace industry makes up about 10 percent of Quebec's export revenues, about 1.5 percent of its gross domestic product, and about 40,000 jobs that pay double the provincial average - making it an economic lynchpin.
Bombardier is majority-owned by the Bombardier-Beaudoin family, which has traditionally had close connections with the political establishment in Quebec.
"The decision to do nothing, it's something we couldn't even consider," Quebec Economy Minister Jacques Daoust told Reuters after announcing the deal. "The day that Bombardier is in difficulty, the entire aerospace industry is in difficulty."
Quebec is pumping money into its financing arm Investissement Quebec to support the CSeries project, but is not making a broader investment in Bombardier which has a profitable rail unit.
It is the biggest investment to date made by Investissement Quebec, which holds stakes in several other companies deemed critical to Quebec's economic development, such as the Stornoway diamond mine and the Alouette aluminum smelter.
Bombardier's narrow-body CSeries line of jets, which is set to compete against Boeing Co's BA.N 737 planes and Airbus Group's A319 and A320 jets, has been delayed for years and is billions of dollars over budget. The struggle to get the CSeries project done and in the air has left Bombardier saddled with more than $9 billion in debt.
The gamble faces further big risks as new orders for the CSeries jet have dried up in a soft market.
Bombardier touted the fuel economy of the CSeries, which has a 20 percent fuel burn advantage over comparable planes, as a key selling point. But that advantage has been lessened by lower oil prices and competition from new generation planes built by Boeing and Airbus that have been outfitted with fuel efficient engines.
In a bid to raise cash, Bombardier has been looking at a wide range of options, including the sale of a stake in the CSeries and the sale of a minority stake in its rail arm.
Credit analysts likened the Quebec deal to the $13.7 billion federal and provincial bailout of Canada's autos industry in Ontario during the financial crisis.
"If you look at what happened in Ontario, you would probably conclude that it did work out in that case," said Douglas Offerman, a senior director at Fitch Ratings. "I think (the Quebec) deal speaks to the province's desire to ensure that it remains a center for aerospace."
"Doing something, or not doing something both decisions in some respects are a gamble on the unknown," he said.
DBRS Quebec debt analyst Travis Shaw said the investment was "not unmanageable" for the province but more information was required to gauge whether it could affect Quebec's plan to balance its budget.
Daoust, who said the investment would not impact the province's budget, said Quebec's risk is limited to the $1 billion investment in the CSeries. He said it would generate returns if the program is a success, but lead to losses if it fails.
"It's a risky situation, but it's a two-way street," he said. "We took it from the positive side."
Daoust said the province has no obligation to put in additional investment if Bombardier's expenses rise more than expected.
Bombardier's CEO Alain Bellemaire said the issue of the company's dual class share structure - which has been criticized by investors and analysts - did not come up in its negotiations with Quebec on the CSeries.
The Bombardier-Beaudoin family controls 85 percent of the super voting "A" shares which have 10 times the number of votes as the "B" shares. In total, the family has a roughly 54 percent voting stake in the company.
Critics of the deal said it raises broad questions about the use of public funds to support private companies.
"We tear our hair out when we see that there is no private money that is willing to back an entity like Bombardier, and the government steps in," said Wudrick of the taxpayers federation.
In the Quebec National Assembly, Pierre Karl Péladeau, leader of the Parti Québécois opposition said the government acted as "pitiful negotiators" and was assuming "all the risks for the benefit of the shareholder."
A spokesman for economy minister Daoust said the government hired an external firm to conduct due diligence on the CSeries before signing the deal with Bombardier.
Quebec teachers and civil servants, who are among about 541,000 public-sector employees trying to negotiate a new collective agreement, staged a one-day strike across the province on Thursday carrying banners that read: "1 billion for Bombardier, cuts for needy students."
Before the latest announcement, Bombardier had received about C$730 million in contributions and loans from the federal government since 1984, according to data compiled by the Canadian Taxpayers Federation. (Additional reporting by Euan Rocha, Kevin Dougherty, and Richard Valdmanis; Writing by Richard Valdmanis; Editing by Martin Howell)