Proceedings of the Standing Senate Committee on
National Finance
Issue 3 - Evidence
OTTAWA, Thursday, December 4, 1997
The Standing Senate Committee on National Finance met this day at 11:00 a.m. to examine the Main Estimates laid before Parliament for the fiscal year ending March 31, 1998.
Senator Terry Stratton (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we do not have a detailed agenda since this meeting is to specifically to deal with the leases pertaining to the Pearson International Airport. I am sure you are aware of the questions that have been asked in that regard.
I would welcome Mr. Sully to our committee. Do you have an opening statement to make at this time?
Mr. Ronald Sully, Assistant Deputy Minister, Programs, and Divestiture Group, Transport Canada: All I want to say by way of introduction is that we are here to answer any questions you have on the changes in the lease for the Pearson International Airport.
I would like to introduce my colleagues: Mr. Rod Dean is our director of lease/transferred property; Mr. John Cloutier is now the director of the national airport system negotiating transfer team; and Mr. Bill Cleevely, is here representing the Treasury Board.
The Chairman: Perhaps you could review with us the process that took place and make clear to us why the negotiations on the Toronto airport stand apart from other airport negotiations that have taken place.
Mr. Sully: In 1992, Mr. Chairman, under the previous government, we negotiated transfers of some of the major international airports. Those were Calgary, Edmonton, Vancouver and Montreal.
In 1984, the new government announced its national airport policy, and at that time the policy framework for transferred airports changed. We were then setting up Canadian airport authorities. They had previously been called "local airport authorities." Under the Canadian airport authority model there was much greater flexibility built into the lease/rental formulas to allow the airport operators to undertake their own financing and get on with the necessary redevelopment and expansion.
At the time the national airport policy was announced, an invitation was extended by the then transport minister to the existing local airport authorities, Vancouver, Calgary, Edmonton and Montreal to come forward and renegotiate their leases. That was accomplished with Calgary, Edmonton and Vancouver. Those changes in the leases were announced last February 28, by the Minister of Transport. Each of those changes provided for significant reductions in the rents payable to the government over the next ten years.
In the case of the Greater Toronto Airport Authority, we negotiated on the basis of the new rules, which were the Canadian Airport Authority rules. In fact, Pearson International was the first of the major airports transferred under the new rules. In that case there was negotiation undertaken for the purposes of transfer. The basic financial terms and conditions had been agreed to by the Greater Toronto Airport Authority and by Transport Canada in December of 1995.
Subsequent to that there is quite a long process that we go through which involves preparation of all of the legal documents, preparations of specific plans for employee transfers and so on, and that can take anywhere from six months to a year.
That is why, although we had reached agreement on the basic financial parameters in December of 1995, we did not actually transfer the airport until December of 1996. At some time before the transfer date of December 2, 1996, it became apparent, both to the new authority and to ourselves, that there was a need to introduce greater flexibility into the rental formula to allow them to undertake the needed redevelopment.
I would point out that, at the time of the first negotiation leading up to December of 1995, both sides had thought that the redevelopment needs were in the order of $1.8 billion. Over time it became apparent to the authority and to ourselves that the expansion capital necessary would be larger than that. In fact, today, I think we are talking about an expansion in the order of $2.5 billion.
Before the transfer date, before December 1996, there was a recognition on both sides that we should build into the rental formula additional flexibility for them to undertake their own redevelopment and improvements.
However, there was insufficient time to finish those negotiations prior to transfer, and a decision was taken that, rather than hold up the transfer itself, those discussions and negotiations would proceed. We would do the transfer and then we would introduce an amendment to the lease at a later time, once having concluded the negotiations. You will recall that those negotiations ultimately were concluded and an announcement was made on the $185-million lease reduction on March 25 of this year.
I hope I have not confused you further. Those were the steps we went through, and that is why the change to the GTAA lease was made just several months after the actual transfer of the airport was made. I do want to stress that these reductions, in essence, put Toronto on a relatively level playing field with the other major international airports' leases that we had already renegotiated. The reductions were made for purposes of specific safety and environmental projects that were defined. These were the new north-south runway, new de-icing facilities, and two new fire halls.
There was included in that a matter of some forgiveness because, by the time the transfer had occurred, Transport Canada had already paid for a good portion of the new north-south runway. There was an agreement that we would forgive the portion that had already been spent, plus the remaining expenditure, and plus the expenditures for the new fire halls and the de-icing facilities.
Senator Lynch-Staunton: Thank you for your presentation. It does clarify certain things. Am I to conclude from what you have said that the concessions allowed the three airports are comparable to what Pearson was allowed? They are not reductions, they are cancellations, are they not? Are they all of the same nature and for the same purpose? You said in one case the new airport policy is probably more generous to the airport authority than the previous government's was and, therefore, you want to bring the three "Conservative" airport authorities, if you like, in line with the Liberal policy and make the working conditions under the leases less rigid and less costly obviously.
Mr. Sully: Senator, I think from the first round of negotiations which culminated in the transfer of those airports in 1992 we learned that the lease rental formulas were quite complicated on the one hand and, on the other hand, they were not flexible enough to accommodate the significant increases in expansion that were necessary.
In the last five or so years there has been a significant expansion in air travel right across the board. We found by experience that the formulas that were in place were not flexible enough to allow the airport authority to do the refinancing that was necessary.
As a general proposition, all of the changes we have made have been with the same intended purpose, whether you are talking about Calgary, Edmonton or Vancouver. All of them have been made with the purpose of providing them with that kind of flexibility so that they can undertake these expansions. They are not, dollar-for-dollar, comparable across airports. I can give you total figures if you wish.
Every airport is unique, but our interest is the same as theirs: We want them to be viable enough so that they can accommodate future increases in traffic and finance the necessary redevelopments. The theory of the new policy is that those financings, or the costs of expansion, will be borne by the users and not by the taxpayers, which was the case in the past when Transport Canada was running all of the airports.
Senator Lynch-Staunton: Am I correct that both Vancouver and Calgary have passenger facility charges? I am not certain if that is the case in Edmonton.
Mr. Sully: Calgary and Vancouver airports do have charges.
Senator Lynch-Staunton: Does the government receive a portion of that charge, or does it all go to the authorities?
Mr. Sully: One of the problems on the Vancouver lease was that the government was getting a small percentage of that. That is one of the conditions we have corrected in the Vancouver lease, so the government does not tax those charges. The government does not collect any revenue from those charges at any of the other airports.
Senator Forest: We do have an airport tax in Edmonton.
Senator Lynch-Staunton: My understanding, from someone who I thought was familiar with the Calgary situation, is that the government does get a percentage of the charge collected, plus the GST, of course. Was I wrongly informed?
Mr. Rod Dean, Director, Lease/Transferred Property, Transport Canada: In the original leases that were signed in 1992, PFCs, or airport improvement fees, were not envisaged as being as essential as they are today. The arrangement was that increased revenues would be subject to a participation rent formula. For example, when the Vancouver airport improvement fee was introduced, it was captured under that formula and, indeed, a small percentage was being captured as part of the increased rental payment to the government. Under the Canadian Airport Authority formula, provisions were introduced to specifically exclude that type of revenue as long as it was, in turn, disbursed on defined airport infrastructure projects.
In the case of Calgary, if the amendment had not been made, a percentage of the airport improvement fee would have been captured but, because the amendments were made, that is not the case.
Senator Lynch-Staunton: I understand the construction cost of T3 was $580 million. I further understand that the syndicate got $719 million and that the total purchase price for the authority, according to the prospectus on page 61, was $855 million. They include in that acquisition costs, whatever they are.
Can you explain why the purchase price was $855 million; how that valuation was made; and whether independent valuations were made to arrive at a specific price, particularly the one that was paid to the consortium?
Mr. Sully: I will ask Mr. Dean to comment in more detail. However, let me say at the outset that the purchase of T3 is an entirely different matter from the negotiations we conducted with the GTAA on the $185 million lease change. The purchase of T3 was a matter between the management of the GTAA and the T3 limited partnership. To my knowledge, there were independent evaluations done on both sides. My understanding is that they were negotiating on the basis of a business proposition rather than a building, and that probably would explain much of the difference between the $580 million and the final amount.
There is an explanation in the prospectus as to how the final amount of $855 million was determined.
Mr. Dean: I will just comment briefly because there are better explanations than I can offer contained within the prospectus. I am not an accountant.
On the point that the historical cost was $580 million and the purchase price was $719 million, I would only offer the comment that that is the difference between the cost of the building and the price of the business. The business is valued higher than the framework within which it is contained.
I understand that there were independent valuations on several sides and that the GTAA was quite comfortable with the price that they settled on. However, that is for them to justify.
As to the figure of $855 million, as I understand it, in purchasing T3 the GTAA also purchased the existing long-term debt of that group. There are bonds involved. The capital amount is only about $360 million, but for accounting purposes you must book it as a long-term debt for future redemption values, and that, of course, is an estimating process. A chartered accounting firm will estimate what it would cost today to buy all those bonds. That, actually, marks it up further to about $490 million. The difference is quite substantial between the capital and what the future redemption value would be.
The Chairman: Normally, in a situation such as this, the seller gets an independent evaluation of the product or item he wishes to sell and the purchaser does the same thing. Did that occur in this case?
Mr. Dean: My assumption is that it did, and all the information I have seen indicates that it did but, again, I must refer you to the GTAA. It was not our purchase; it was the GTAA's purchase.
The Chairman: I understand that. Amazingly, on a project of this size, there was no quarrel or problems with the differential between what the seller wanted and what the purchaser was willing to offer.
Mr. Sully: The government was not privy to those discussions. We were aware that discussions and negotiations going on between the parties and that offers were being made. We were also aware that there were, obviously, differences, but we were not given any detail on that. Ultimately that matter was sorted out between the two parties.
Senator Lynch-Staunton: That eliminates many of my questions on T3.
If I understand you correctly, the government at no level, either through your department, at the political level, or through Treasury Board, was involved in the negotiations between the airport authority and Pearson Development. That surprises me because they are still the landlord.
Mr. Sully: The government was obviously interested in what was going on.
Senator Lynch-Staunton: Yes, and no doubt encouraged it, but I want to know if you were a party to the negotiations at any stage.
Mr. Sully: The government was not a party to negotiations. In fact, the CEO of the GTAA, Mr. Turpen, has made it quite clear that, through that whole process which went on for about 16 months, the government was largely left in the dark. The government thought, as did the GTAA, that ultimately it would be advisable if all the operations of the airport were brought under one umbrella. It makes it very difficult to run an airport when you have two different groups controlling different aspects of the operations. There are tremendous synergies and economies of scale in having one operation. The government was interested in seeing them come to a successful conclusion, but that does not say the government was involved in the negotiation.
Senator Lynch-Staunton: I cannot quarrel with the intelligence of having everything under one umbrella, but I am surprised to hear you say that the government had become so passive that it was not involved at all in this massive purchase.
We heard during the Pearson hearings and during the court case that the whole operation was running at a loss; and now we are being told it is so profitable that we cannot afford to pay this exorbitant price. However that is for others to answer.
Once the transfer was made, were there any changes to the T3 lease between the airport authority and the Government of Canada?
Mr. Sully: When we transferred the airport in December of 1996 we essentially transferred our obligations for the T3 lease to the GTAA. There were no changes that affected us in any financial sense. Perhaps Mr. Dean could explain that further.
Mr. Dean: When the transfer of the airport occurred to the Greater Toronto Airport Authority, all agreements were assigned, including the Terminal 3 agreement which was, obviously, a major one. There were hundreds of revenue agreements. If you include the expenditure agreements, there were probably thousands of agreements that were assigned completely to the Greater Toronto Airport Authority. They assumed our rights and obligations. There were no subsequent changes to the agreement with Terminal 3 specifically, and I can say that categorically because none can be made without the consent of the landlord. What actually ended up happening was, when they purchased Terminal 3, that agreement was in effect collapsed. It was no longer a lease between the Terminal 3 group and the Greater Toronto Airport Authority because, of course, the purchase took place.
I should correct that on just a technical point and say that the landlord was not 100 per cent passive in this process. Obviously, as a landlord, there are certain documents that must be gone through in the normal, commercial practice that would happen in a change of this nature for any tenant. Yes, we did "consent," I guess is the word to use, to the collapsing of that lease. It had to be collapsed in order for the purchase to take place. It is not peculiar to that deal.
Senator Lynch-Staunton: It was a rather unusual deal, and I think it was treated in a very unusual way.
When the airport authority became owner of the T3 terminal the lease between the government and the former T3 owners was collapsed; is that so?
Mr. Dean: Yes.
Senator Lynch-Staunton: Is it now being operated under the basic rental agreement?
Mr. Dean: Yes.
Senator Lynch-Staunton: Any restrictions which appeared between the private developer and the government have been eliminated. I am thinking of one in particular which was that T3 was not allowed to impose a passenger facility charge under the old lease, the collapsed lease. Is that correct?
Mr. Dean: I do not remember that specific, senator.
Senator Lynch-Staunton: Now there are no restrictions of that nature in the lease between the government and the airport authority.
Mr. Dean: That is correct.
Senator Lynch-Staunton: Under the Pearson contract, no passenger facility charge can be imposed unless one major airline declares bankruptcy. Now that protection against a passenger facility charge is gone and the airport authority, unilaterally, can impose one without the landlord's approval. Is that correct?
Mr. Dean: That is correct.
Senator Lynch-Staunton: In line with the policy which Mr. Sully stated at the beginning, the user fee approach is the approach we are taking now and passengers, more and more, must bear the costs of the actual running and maintenance of airports. Is that correct?
Mr. Dean: The financing methods are up to the discretion of the local airport authority or the Canadian Airport Authority.
Senator Lynch-Staunton: The Government of Canada, as landlord, has no say as to the amounts that can be charged, it is up to the airport authority; is that correct?
Mr. Dean: That is correct.
Senator Lynch-Staunton: This is a form of tax which a so-called non-profit organization is allowed to impose on the consumer. I find that the government would not have had a say in a determination of that. The airport authority simply stipulates, as Montreal did the other day, much to everybody's surprise, that passengers must go to a booth or to a machine, pay the tax, and then proceed to the counter to pick up or purchase a ticket. Do you not find that strange?
The government is a landlord and the owner. Eventually everything will revert to it, so it has not lost its interest. That being so, it should have a continuing, active interest, including the protection of the consumer. If the government imposed a tax then that would be quite proper, whether it was exorbitant or not, but this is a tax being imposed by a non-profit organization which is answerable to no one, not even to the landlord.
The Chairman: It is very monopolistic. Passengers do not have a choice about which airport they will use. I understand that these moneys which are collected will be used for the development and redevelopment of airports, but there is no control over what they can charge.
Mr. Sully: Senators, there are some natural checks and balances in the system. The airport authorities have deliberately chose to do their financings through passenger facility charges. One of tenets of this policy is that the taxpayer will no longer be financing these undertakings, that will be paid for by the users of the airport. However, the authorities are accountable to a board of directors. That board is dominated by a variety of municipal and other interests, so they do not have a completely free hand to do whatever they want.
Yes, they are not-for-profit organizations and, to the extent that any surplus revenues are generated, they must be reinvested in the airport.
Mr. John Cloutier, Director, NAS Airport Transfers, Transport Canada: Part of the checks and balances in the structure of Canadian airport authorities is that they are a non-profit organization and, therefore, they must reinvest any funds they generate, including those from a PFC. They are also required to respect international civil aviation organization guidelines on the charges that they impose on airport users, which means that, basically, they can recover their costs of processing passengers. They must respect those obligations.
The structure of the airport authority is a publicly nominated board, or a number of public organizations, provincial, federal and municipal governments in large part and, because they are in turn accountable within their community, there is a great deal of accountability. Instead of being here in Ottawa the accountability is at the local level.
The airports were monopolies when they were operated by the federal government, and they continue to be monopolies. I guess that is the nature of airports.
The only collateral an airport authority in Canada can pledge to investors is the cash flow of the airport. If the government were to regulate any PFCs or any other user charges, then the government could influence the collateral between the airport authority and private-sector lenders. Then the government could become a party to the transaction.
As Mr. Sully mentioned, the intent was that airport investments and operations would be funded by users and not taxpayers, so that the government would have no liability or assume any obligation of any airport authority.
Senator Lynch-Staunton: Do you have any say in the nature of the capital investments? For example, at Pearson T1, Mr. Sully, you said that, during the discussions on the lease, it went up from $1 billion to $2 billion plus; is that correct?
Mr. Sully: Two and one half billion.
Senator Lynch-Staunton: That is a sharp increase.
What guarantees are being given to the government that these projects will actually come to fruition? I know there is a master plan with details in the prospectus, but is there a firm commitment in the lease -- other than a penalty for not doing so -- that these projects will be realized, or is that up to the authority to decide in the long run?
Mr. Sully: Senator, the $1.8 billion figure is built right into the lease. They must expend those moneys on expansion within the first 20 years of the lease. I am not sure of the exact number of years.
Senator Lynch-Staunton: What if they do not?
Mr. Sully: There will be a rental penalty imposed.
Senator Lynch-Staunton: What is the rental penalty? I tried -- and had assistance from somebody who is much more knowledgeable about these matters -- to understand the Ground Lease. It is in language which is absolutely incoherent.
Mr. Sully: I am sympathetic. The Ground Lease is very complicated. I will ask our lead negotiator to try to explain it to you.
Senator Lynch-Staunton: We do not really have time to go into the details of the Ground Lease. I know that, if these capital projects are not realized, additional rent is to be paid, but what happens if that rental is not paid? Are they in default of the lease?
Mr. Cloutier: If any type of rent is not paid to the federal government, the airport authority is in default.
With respect to the $1.8 billion capital investment, there is a requirement in the Ground Lease, as part of the overall transaction between the federal government and the GTAA, which recognizes that the $1.8 billion must be spent on the airport in order to handle the passenger traffic forecasts. The rent was structured accordingly.
If the airport authority spends less than the $1.8 billion -- and it is set out in the Ground Lease that it shall be in five-year tranches -- additional rent is to be paid by the GTAA to the federal government on that portion of the $1.8 billion that is not spent. I cannot remember the percentage of additional rent to be paid, but it would be on the unspent portion of the $1.8 billion.
Senator Lynch-Staunton: Who established the $1.8 billion and the $2.5 billion? Can those figures be amended?
As the landlord, what is the government's authority over the expansion plans of Pearson airport? Can the 5-year plans, the 10-year plans, and 20-year plans be amended by the authority, or is the government, as a landlord, ultimately responsible for ensuring that not only are the plans executed, but executed properly, meeting all those standards you mentioned earlier?
Mr. Cloutier: There are a variety of normal safeguards to protect the asset of the landlord built into the Ground Lease that one would find in a normal landlord-tenant relationship. There are a variety of other safeguards built into the Ground Lease to ensure that, as an airport operation, the public interest is protected.
As to the safeguard respecting the development at the airport, the government has operated the airport under a master plan, and part of that master plan, which is a long-term development plan for the airport, has a land use plan. That land use plan sets out how various segments of the airport can be used; protecting, obviously, that part of the airport for airplanes to come and go and land and passenger processing. The airport authority is required to respect the land use plan in their development at the airport. There are a variety of requirements on the airport authority to meet passenger processing standards and so on.
The master plan, and hence the land use plan, cannot be amended without the approval of the Minister of Transport. To that extent, the airport authority is bound by the master plan and the land use plan which is a broad guideline as to how different lands at the airport can be used. That is obviously all in the interests of ensuring we have a proper airport operation.
Senator Bolduc: Will you undertake a review process, say, every three or five years, of that capital project planning? If so, how would be the airport authority participate in that? Am I correct in assuming that the capital project programming is a government function, not a function of the airport?
Mr. Sully: Under the new arrangements, that kind of function is a function for the authority. The responsibility of the government is to ensure that they do not contravene the parameters of the Ground Lease on matters such as land use.
The balances in this system are, on the one hand, any restrictions that are in the Ground Lease; second, the fact that the board of directors is ultimately accountable -- and they are representatives of the local community, so it is in their interest to make sure that the expansion plans are reasonable; and, third, the test of financial markets. If they have something in mind which is overly ambitious, they will find that out when they go to the markets for financing.
There are also provisions in the Ground Lease whereby, when any airport authority undertakes a major refinancing, there are certain sign-offs or clearances required from the Minister of Transport, so we have an opportunity to look at the proposals at that point.
The Chairman: With the implementation of the user fee, I would imagine that the intention is to build up a cash reserve to do capital improvements. Are there limitations on the cash reserve that they can put aside; or are there any limitations respecting that user fee?
Mr. Dean: I think you will find, senator, that the public accountability is sufficiently strong and the reaction to the imposition of a passenger facility charge, or an airport improvement fee, is sufficiently strong that it is not a step taken lightly and, although the potential exists for building up a reserve, I think what you will find is that they are in place as pledged cash flow for existing financing. The capital markets have been involved from the start, and there is a specified investment program.
The development plan is pretty well defined in the prospectus, as is the situation with respect to the disposition of bond proceeds. They will go into a type of redemption reserve to retire this type of debt. Although they are not using a PFC in that particular instance, they are doing it with other types of user charges. I think you will find that at an airport that is using PFCs, exactly the same situation exists. What we are talking about here is a pledged cash flow to be used to leverage financing.
The Chairman: Now that these are local airport authorities, would that allow for commercialization of portions of the airport lands? By way of illustration, in the United States, after the Second World War, the U.S. government took steps to protect the lands of their major airports, as well the perimeter around those lands, from certain development. However, they have allowed certain commercialization of certain airport lands. In other words, they have built facilities which they have rented to the private sector. Will that situation prevail at our airports?
Mr. Sully: They are bound by the Ground Lease to certain uses on airport lands and certain uses only. Within that context, they are allowed to set up subleases for certain purposes.
Mr. Dean: If by "commercialization" you mean real estate and commercial development, that is quite permissible under the terms of the Ground Lease. Originally I thought you were talking about disposition, such as an actual sale.
The Chairman: No.
Mr. Dean: That is absolutely forbidden. Mr. Cloutier referred to the land use plan, and the master plan. That, of course, is the guiding document. For many cogent reasons, airport lands are quite a bit larger than what is required for airport operations. In the existing land use plans there are reserves set out for commercial development -- aviation related or even non-aviation related -- that are compatible with the operation of the land. Those would be sources of additional revenue streams. The authorities do have the flexibility to pursue those initiatives and, indeed, we would encourage them to do so. We did when we were running the airports. However, it must be in accordance with the approved land use plan. In other words, you cannot put a hotel in between two runways but you certainly could built it on land where it would be compatible with its surroundings.
Senator Lynch-Staunton: Why was it necessary to sign the lease on December 2, 1996 when one of the key elements to the lease, the payments under the Ground Lease, had yet to be determined and, in fact, were only determined by an amendment to the lease dated April 7, only four months later? Why did they not wait until that part of the lease was finally decided upon and then include it as part of the original lease?
Mr. Sully: As I tried to explain earlier, senator, there was agreement on the basic financial terms and conditions back in December of 1995. Under our system, that triggers a whole series of events surrounding the work that must be done to effect the transfer. Normally both sides are committed to expediting that. It is my understanding that, when the actual transfer documents were signed on December 2, 1996, the basic provisions for rental were well spelled out, but there was an understanding at the time that the two sides would pursue further the question of the need for additional flexibility to be built in. That then culminated in the agreement to adjust the rentals by $185 million over nine years. That was announced in March of this year.
Senator Lynch-Staunton: That does not answer the question: Why did the lease need to be signed before that part was incorporated in the original lease? What was the rush to have the lease signed, knowing full well that negotiations were under way respecting some major rent cancellations? It was known that the runway would cost $72 million, and it was shown on the authority's books as a debt. What happened between December 2 and April 7 to wipe that out?
Mr. Cloutier: The discussions with respect to the additional development which was identified as being required at the airport had been identified during 1996, but it made more sense to continue the transfer process for Pearson under the deal that had been agreed to in terms of the memorandum of agreement on financial terms and conditions and so on. One of the problems we would run into was related to the fact that many dates had to be set for a variety of legal purposes. We had to notify tenants, distribute layoff notices to employees, and so on. Once you establish those dates, they are very difficult to change because these things move in tandem. It was simpler to go ahead on the basis of the original transaction as contemplated, and proceed with the transfer of all the agreements to the airport authority, all of the legal obligations, the transfer the employees and so on. They also had their bankers, their insurance, and their other administrative arrangements all geared to a certain date, so it was easier to proceed on the basis of that date, let the other discussions proceed, and to reflect that after the fact.
It was also a case of, until the airport authority actually takes possession of the airport, it is not operating anything, so it is making plans with no guarantees. We would have postponed the airport authority's planning for the airport by delaying the transfer.
Senator Lynch-Staunton: You have not convinced me. I think the answer has to do with the fact that we were approaching an election and it was easier to get it out of the way when nobody was watching.
Under the Pearson contract the developers were allowed a rent deferral for the first three or four years, and then they were to repay the deferred rental in subsequent years, with interest, on the assumption that they would be generating enough funds to pay back that temporary forgiveness. Why are similar clauses not included in agreements with authorities where you have given rental forgiveness? Why is it not a real deferral -- on the assumption that a deferral is a delay but will, eventually, be paid?
Mr. Cloutier: With the transfers that we made in 1992 three of the airports had a similar deferral mechanism built into their ground leases. That was factored in throughout the process for the 1992 transfers, as well as the 1996 and 1997 airport transfers. We keep in very close consultation with the financial markets in Canada and actually, indeed, in the U.S., and we discuss the financial arrangements, so that at no point in time do we build in any impediments to the airport authority being able to finance on its own. As a result of those consultations, when we got into the 1996 and 1997 airport transfers, the advice we got from the financial markets then was that, given that the airport authority concept was now known in Canada, had in effect been tested, and that the four airport authorities that were operating were quite successful, maybe the rent deferral mechanism was not required. In the case of Toronto, it certainly was not required, so it never came up. No other airport authority and none of our consultations with the financial community indicated that this deferral was required for the transfers that are now occurring.
Senator Lynch-Staunton: When you add it all up, using your figures, the Calgary, Edmonton and Vancouver cancellations of rentals amounts to $289 million and nearly $200 million at Pearson. That is a waiver of almost $500 million in rentals. These airports, and Pearson I include in that, if they do not already have them, will eventually impose a passenger facility charge. How will the taxpayer benefit from this sort of arrangement? What is the offset?
Mr. Sully: In looking at all of these airports, our view, senator, is that in all cases the taxpayer will be better off than had we continued with Transport Canada operating the airports. They are, almost without exception, undergoing major expansions. Had we kept those airports those expansions would have been very costly to the taxpayer. They are spending at a rate that we were not spending at historically.
When we consider the revenues that we would have recouped had we held on to the airports, and when we consider our costs and add to that the capital costs necessary, even taking into consideration the reductions in rentals made at certain of these airports, we are quite confident in saying that the taxpayer is still better off in the case of Pearson as just one example.
We will collect about $3 billion in rental payments in the first 20 years of the lease; and it is a 60-year lease. We have satisfied ourselves that the taxpayer is in a better situation today than had we continued to run these airports.
Senator Lynch-Staunton: That is quite an admission of failure, is it not, that the government is now saying that they cannot run airports? Is that what you are telling us? That is an extraordinary statement.
What will you do after 60 years when it reverts? Surely you did not mean what you said -- that the Government of Canada is unable to manage airports?
Mr. Sully: I was not talking about the ability to manage airports. Transport Canada is very proud of its tradition in managing airports. They managed them very well for a long time. I was talking about the tremendous growth in traffic and the expansions that has necessitated in the market.
If you think about what we would have had to spend had we held onto those airports, all of those expenditures would have fallen on the backs of the taxpayers, and we believe that, in this situation, the taxpayer is better off.
Senator Lynch-Staunton: The taxpayers are better off because the airport authority can borrow up to $2 billion, impose a passenger facility charge, and all of the infrastructure will be a gift.
Senator Cools: I am glad this is not a which is bill before us.
Senator Forest: My knowledge of Pearson airport is limited, but I am familiar with airports in Alberta, particularly the one in Edmonton. I would like to address the issue of the accountability of the authority's directors who comprise some of the most prominent businessmen and women in the area, as well as municipal and provincial government representatives. The people of Edmonton certainly hold them accountable. They believe that accountability and management at the local level is the best way to proceed. Although no one is pleased that they have imposed an airport tax, I think most of us who are travellers accept that we are the ones who should be paying for the services provided rather than taxpayers who never use the airport.
Senator Lynch-Staunton: In Montreal the authority closed down Mirabel Airport without any consultation with or input from the federal government. The federal government washed its hands of it. Here is a billion-dollar-plus facility which will now be used for cargo and charter flights. This is an asset owned by the Government of Canada which the authority felt, for profit purposes, it would be better to close down and transfer the flights to Dorval. There was no accountability. The authority is made up of prominent people who, unlike our elected representatives, need not account for their actions. One authority, answerable to no one, closed it down.
The minister and others who were asked questions, responded by saying it had nothing to do with them, it was the authority's responsibility. That is the weakness of these authorities: They believe they are the ultimate authority, accountable to very few. That is not how I think government assets should be managed.
Senator Lavoie-Roux: The government tried to consult the population on this. I am sure you recall the controversy when it first was built, as well as all the dealings that went on. However, that is history.
Senator Lynch-Staunton: Perhaps the committee would invite someone from the airport authority to appear before our committee some time in the New Year, because my remaining questions have to do with T3 and I know these gentlemen cannot give us the answers.
The Chairman: Where the brunt of these decisions will be felt is not in the major centres but in remote areas. Some small airports in Manitoba will have a tough time trying to survive financially.
Senator Cools: The exchanges today certainly provoke many questions. Perhaps we should continue this examination and not consider this to be our final meeting on this topic.
The Chairman: I would thank our witnesses for taking the time to answer our questions today.
We have two other items of business to discuss. First, we have received a letter from Mr. Bruce Rowsell in connection with the hemp question. The regulations will be published on December 18 and published in the Canada Gazette in January. I will ask Senator Milne if she thinks the committee should hear from officials from Health Canada in, say, February when we will have had an opportunity to consider the regulations. We may have appropriate questions at that time.
Second, we have invited the president of the Treasury Board, the Honourable Marcel Massé, to appear before our committee. He was schedules to appear on Thursday, December 11, but he is unable to do so. Is it the wish of the committee that we ask him to make himself available during the following week?
Senator Cools: Absolutely.
The Chairman: We will invite him to appear on December 17 or 18, providing that we are still sitting. Alternatively, we will invite him to appear before us in February.
The committee adjourned.