Proceedings of the Special Senate Committee on the
Pearson Airport Agreements
Evidence
[English]
Ottawa, Thursday, July 27, 1995
The Special Senate Committee on the Pearson Airport Agreements met this day at 9:00 a.m to examine and report upon all matters concerning the policies and negotiations leading up to, and including, the agreements respecting the redevelopment and operation of Terminals 1 and 2 at Lester B. Pearson International Airport and the circumstances relating to the cancellation thereof.
Senator Finlay MacDonald (Chairman) in the Chair.
The Chairman: Come to order please. We have two interesting witnesses today, the two you see before you and the witness we have this afternoon. I think we will have an opportunity for extended questions. We will not be too worried about time constraints, Senator Bryden, you will be pleased to know.
Senator Bryden: Mr. Chairman, you will also be pleased to know that I have only one page of notes.
The Chairman: And also that you are going to New Brunswick this afternoon sometime.
Senator Bryden: I had spoken to the clerk and with leave, I just have to do it, I need to leave as soon as I am finished with this witness. Senator Gigantès has been arranged by Joyce Fairbairn's office to substitute for me this afternoon.
The Chairman: We will miss you.
Senator Bryden: I know.
Senator Kirby: I can tell you with somewhat more sincerity, we will miss him.
The Chairman: All right. Then the commission counsel, Mr. Nelligan will introduce the witnesses.
Mr. John Nelligan, Q.C., Counsel to the Committee: Senators, we have two witnesses this morning. The first is Mr. Harry Swain, who is the Deputy Minister of Industry Trade and Technology, and with him is Ms Connie Edlund, who is a Special Advisor to the Assistant Deputy Minister who will be discussing with us a special report which they prepared in the latter part of 1992.
The Chairman: Now witnesses, you are no strangers to truth but we have a policy here so you will be sworn.
(Harry Swain, sworn:) Yes, consistent with my oath of office.
Senator Jessiman: I would like to know what that means. What do you mean by consistent with your oath of office?
Mr. Harry Swain, Deputy Minister, Industry Canada: I have sworn an oath of office, an oath of secrecy which means that there are some things that I am not to discuss.
Senator Jessiman: You do not think this committee has the authority to ask you to answer? I would like to know.
The Chairman: With all due respect, the answer the witness gave is perfectly in order. You do not have to answer any questions which offends what you describe as your oath of office. We are just afloat for an affirmation of truth on those things to which you can give.
Mr. Swain: Absolutely.
The Chairman: We do not at this stage of the game want to get into privacy matters to the degree that you have just expressed.
Mr. Nelligan: I think, Mr. Swain, the concern was, did your oath of office include a promise to lie on certain matters? And I did not think that that was the case.
Mr. Swain: No, sir.
(Constance Edlund, sworn:)
The Chairman: Mr. Swain, you are no stranger to a lot of us here. You have had a distinguished career in the government. I remember some years ago you being particularly helpful to some friends of mine in the maritimes who were anxious to get a briefing in the middle of the summer. They called me afterwards and wanted to know what my relationship was with you that I could arrange such a quick and happy meeting, which they were very pleased to have.
Now, would you like to make a few opening remarks and introduce Ms Edlund and tell us her participation in this matter?
Mr. Swain: Thank you, Senator. In the fall of 1992 my then minister, the Honourable Michael Wilson, became concerned about the negotiations over Pearson. Specifically, he was concerned with the financial competence of the bidders to perform on the long-term obligations being contemplated, and he asked me for information and advice.
I spoke to the then Deputy Minister of Transport, Madam Labelle, about one or two of our experts getting access to Transport's closely held records. She agreed and I asked Ms Connie Edlund to undertake the work. She and Mr. Al Curran, also of the Department of Industry, Science and Technology went to Toronto and in a short time produced the report which is now before this committee. This report is not part of the formal evaluation of Transport Canada. It is an independent review.
I provided copies of the report to Mr. Wilson, to the then Clerk of the Privy Council, Mr. Shortliffe and to Madam Labelle. With that, Mr. Chairman, perhaps Ms Edlund could tell you the highlights of what is in the report.
The Chairman: Yes. You realize that we just received these yesterday, and that is one of our problems is trying to absorb the material overnight or whenever we can. Ms Edlund, would you give us an idea of your qualifications to undertake this study?
Ms Constance Edlund, C.A., Acting Director, Small Business Loans Administration, Industry Canada: I am not sure if you received a copy of my CV, but I am a chartered accountant. I joined the government in early 1992. I came from an oil company where I had worked for 11 years, and prior to that I was five years in private practice. During that period I was with the oil company. I spent three years on an executive interchange in Ottawa at which time I worked predominantly with privatization matters. I was the head lead in the project to privatize Fishery Products International. I worked with National Sea.
I worked on the SMDCL Nuclear merger and subsequently it was privatized. Radio Chemical. I did a little bit of work with the Air Canada file at that point and time, and a few odds and sods other than that during that three year period.
In Husky I was vice-president and controller of the Canadian operations from 1982 until I came on an executive interchange in 1985. So, I was very much involved with looking at financial proposals, and as you know in oil companies you are doing a lot of acquisitions and investitures.
The Chairman: That is all very well and good. What else did you do? All right Ms Edlund, would you proceed please?
Ms Edlund: Well, as Mr. Swain has said, I was asked in October 1992 to undertake a review of the proposal for redevelopment of the terminals at Lester B. Pearson International, specifically focusing on the financial viability of the consortiums that were bidding on the projects.
As Mr. Swain has said, Mr. Al Curran, who is also a chartered accountant, worked with me on the project. We prepared a list of financial information required to undertake this task and submitted it to Transport Canada officials in advance. But as the files were being held under lock and key in Price Waterhouse's offices in Toronto, we made arrangements to be there on November 2nd and 3rd accompanied by Mr. Keith Joliffe, who at that time was Director of Special Projects at Transport Canada.
We were advised at that time that we could take no photocopies and that all documentation and notes were to be by hand due to confidentiality restrictions we understood.
After the two days, we felt that we had enough to do an overview for Mr. Swain and returned to Ottawa to write the briefing note that was delivered to Mr. Swain on November 8th.
Basically, our findings were as follows: In terms of financial soundness, we felt that the ATDG proposal was preferable. Our concerns with the Paxport proposal were numerous. One of them was that the amount of equity in the Paxport proposal appeared insufficient and was significantly less than that proposed by ATDG.
Furthermore, over $39 million of the equity was to come from public offering in 1996, which may or may not have been feasible. They had forecasted that dividends of 10 per cent payable to the shareholders were forecasted to start immediately. A large portion, I think 16 per cent, of the capital costs were to be financed from internally generated cash flows from operations.
The forecast revenues appeared overly optimistic. If circumstances did not unfold as forecasted, for example, in the event of capital cost overruns, failure of the public offering, operating cash short falls or something of this sort, we did not feel that the shareholders, particularly Matthews Group, the largest shareholder, would have the necessary financial resources to make up the difference. We felt that Paxport's forecasted management fees seemed very high.
On the other hand, should all of Paxport's forecasts have come true, the forecasted rental payments to the government would have been significantly higher than those proposed by ATDG. Three times higher during the construction phase, and two times higher when in operation. In essence, those were the most significant findings we found in our report.
The Chairman: Are you ready for questioning then?
Ms Edlund: Certainly.
The Chairman: Can we introduce now a small country trial lawyer to start the questioning, former Deputy Minister, very modest man, poor man's Matlock, Senator Bryden will start the questioning.
Senator Bryden: Thank you, Mr. Chairman. You will be pleased to know that Mr. Swain took care of half a page in his statement and Ms Edlund took care of a good part of the rest. The summary is very helpful.
Ms Edlund, do you have a summary of your findings in the report of November the 8th that you provided to Mr. Swain? I wonder if you would go to page 2, and just carefully for us take us through the various heads starting with "A" project financing.
Ms Edlund: Certainly, no problem. The very first one was the project financing. You have to understand we had a limited time to deal with this. We concentrated on the financial aspects of the deal. We did not look at an awful lot other than to ask a few questions.
As we went through the project financing, one of the things that we noted very quickly was that the Bronfman Group, that is the ATDG proposal, proposed a great deal more equity. They had $130 million equity into the project versus what Paxport was in fact proposing to put up. They were looking at $66.5 million, which is only 8 per cent of the total financing required for the project.
Senator Bryden: And the ATDG group was putting up 33 per cent equity?
Ms Edlund: That is correct, $130 million, so they were putting up 33 per cent equity versus Paxport's eight per cent.
Now over and above that, Paxport was proposing to inject another 5 per cent equity, which was about $40 million, through a public issue.
Now, obviously you have issue costs which would be about 2 per cent, so it is $39.2 million that would come from their equity in that regard. It still was very low in terms of what we would like. They were looking at funding a great deal of that through their operating cash flows, and this is where we had to concentrate on where they were going to get -- or whether it was achievable to reach their operating cash flow projections.
Senator Bryden: When were the Paxport people going to do their public issue?
Ms Edlund: They were going to do it in 1996.
Senator Bryden: Your conclusions in relation to each of the groups I think is in the next paragraph.
Ms Edlund: That's correct. It was obvious in everything we read that there was no problems in terms of financial soundness of the Bronfman Group. We knew financial statements that were available to us. We also had opinions that had been presented. We did not feel that there was a concern there, particularly given the amount of equity they were putting into the consortium as well.
However, in the case of Paxport, what we did is we went through, as we did with the Bronfman's, each individual shareholder within the proposed entity to find out how they were doing financially and what we though might happen. We noticed the largest shareholder, which was the Matthews Group, appeared to us to be on very shaky ground. Although they had never had any losses previously, it looked like they were carrying extremely high debt loads, and there was some question of whether they would in fact be able to carry through with what they were in fact proposing.
Senator Bryden: I believe, if you go to the next page in your summary on Paxport, there was some concern about the ability of each of the groups to be able to cover short falls or unforeseen circumstances. Would you expand on that?
Ms Edlund: As we looked through -- there is many, many things that can happen in a project of this nature. You can have capital cost overruns. You might see economic downturns where you are not able to achieve the cash flows you had in fact forecast. The consequence, there is usually a requirement to come up with some more equity. In that case with the equity, you have to have some source of obtaining that financing.
In this case, we were not able to identify sources where that equity might come. Particularly in view of that kind of thing, if you were going to a public issue and very dependent on that happening, if you were in a downturn and were unable to obtain those cash flows, it is highly unlikely that you could turn around and an equity issue would be successful or that you would obtain that financing, or if you did obtain it at any form of reasonable rates. So those were our concerns.
Senator Bryden: Item "D" the revenue assumptions, could you go through those and add any clarifications.
Ms Edlund: There was one prime difference between the two proposals. Under the ATDG, they intended to shut down Terminal 1 and redirect traffic into Terminal 3 at that point and time, and as you know they owned Terminal 3.
Paxport on the other hand intended to keep it open, so they wouldn't be using excess capacity available at Terminal 3, but would continue operating Terminal 1.
They also, in that case, ATDG intended to keep with all the existing contracts. There were many contracts. There was Air Canada contract, in terms of the charges that they were charging to the airline, there was the concessionary rentals and so on. They weren't expecting to increase them immediately, certainly not during the construction phase, as they expected the traffic would not increase appreciably during that period of time.
Senator Bryden: When did they intend to renegotiate those agreements?
Ms Edlund: They would do it in fact as leases came up.
Senator Bryden: As the leases expired they would renew them?
Ms Edlund: That's correct. Whereas in the case of Paxport, Paxport was looking at immediately renegotiating all of the leases, which is a tough thing to do because that requires somebody to be receptive on the other side of renegotiation, and they were then immediately going to be charging substantially higher rents to the lessees. That creates a problem or certainly a risk in there of not being able to be successful in the negotiation.
Senator Bryden: I think in your report you indicated that Paxport, their cash flow projections indicated significantly higher prices to the airlines and the concessionaires.
Ms Edlund: That's correct. If my memory serves me correct, Air Canada was paying about -- Canadian under T3 was paying about four times higher in terms of rental revenue than Air Canada for T2, and they were projecting a pay out to Air Canada which would allow them immediately then to start charging the higher rates.
Senator Bryden: And the contracts, the leases, you indicate here that Paxport was proposing to immediately renegotiate existing contracts and charge rates that are approximately double those now in place?
Ms Edlund: That's correct.
Senator Bryden: On page 4, you make a reference to the fact that you did not attempt to assess the impact that increased airline fees would have on the airlines themselves.
Ms Edlund: That's correct, in this report we didn't.
Senator Bryden: Did you make any attempt to assess the impact that those increased fees would have on the travelling public?
Ms Edlund: We looked at that. If my memory serves me correct, in the ATDG proposal we looked at terms of what it would be on a per head basis, sort of the costs they would be charging. We did not look at the overall economic circumstances surrounding. Thoughts occurred to us certainly, because the airlines, as you know, were having difficulties, but we could not in a limited time scope really concentrate on that. We had to focus in on what we were asked to do. So we only on the periphery asked ourselves the questions.
Senator Bryden: Item "C" on page 4, the management fees?
Ms Edlund: Well, the management fees, this is one that kind of got us a little bit. Because we started looking at it, and I believe in one of the schedules that support it, it actually shows the definite increase. In fact, I think if you look to the second last page of the report, it talks about the escalation in management fees that would be paid, and it increases substantially.
We saw through the ATDG proposal it increased approximately 15 per cent being charged across the board, which seemed somewhat reasonable to us. However, we increased on Paxport the management fees as total rose from 1993 at 24 per cent to 1998 to 42 per cent and staying constant at 42 per cent. We felt that was quite high. So we made note of that.
So we brought that up basically as a question, because certainly that combined with the dividends being paid out at 10 per cent and 42 per cent management fees, when you have a somewhat fragile situation concerning revenue projections and little bit of equity, we felt that on a financial basis that led us to be somewhat nervous.
Senator Bryden: Ms Edlund, would you read into the record the next paragraph, the paragraph that begins, "If Paxport's cash flows are generated --"
Ms Edlund: It says:
If Paxport's cash flows are generated at the rates it is forecasting, then these high levels of management fees will be of no concern. When taken with the shareholder's high dividend demand however, they are, perhaps, an indication of rapacity.
Senator Bryden: It is easier to write than it is to say.
Ms Edlund: Sometimes, yes.
Senator Bryden: Just in passing, you refer to the shareholders high dividends demands. What were those?
Ms Edlund: Ten per cent. They were starting immediately.
Senator Bryden: That is 10 per cent of profits or cash flow?
Ms Edlund: Ten per cent of profits, I believe. Ten per cent return on equity, I believe. It's been a long time since I have gone through this. It is 10 per cent of their equity investment each year. It is on page 6 of the Paxport addendum.
Senator Kirby: Part of our problem is the Xerox, the numbers are not coming through.
Ms Edlund: Did you find it by chance?
Senator Kirby: I read it this morning, but I cannot find it.
Senator Bryden: The reason I asked the question, and I would not have asked the question if I hadn't read it somewhere, is my understanding is it was 10 per cent of cash flow. There is quite a difference between 10 per cent of profit and 10 per cent of cash flow.
Mr. Swain: It appears that in the reproduction of this, the pages were cut off.
Ms Edlund: If you count 10 pages from the back, it starts off with "Paxport's proposal capital cost and financing --"
The one thing to keep in mind is that the dividends are such that they are not required to be paid out. You can always stop paying. Depending on the type of dividends you can curtail payment.
Senator Bryden: I am not trying to be difficult. I do not know the basis of the dividends. Is it dividends paid on profits or cash flow?
Ms Edlund: I think it was dividends paid on equity, if I'm not mistaken, of the equity that was injected, invested.
Senator Tkachuk: Could you clarify that, is that 10 per cent of the $106 million or 10 per cent of the $65 million? There is going to be 40 and 60. There is going to be $106.5 million worth of equity. Is that 10 per cent of dividends of the $106.5 million or 10 per cent of the $66.5 million.
Ms Edlund: We looked at it through the various pages.
Senator Tkachuk: That is important when you answer the question.
Mr. Swain: If I may, the next page there is a table that is cross-wise on the page. It is labelled page 7 and it shows, you will notice, year by year, '93, '94, '95. In the first year, $66.5 of equity is to be paid in less $1.3 million worth of equity cost, less dividends so that in the first year immediately there would be a payment of $6.6 million in dividends. In each succeeding year, there is a $6.6 -- in other words 10 per cent of equity -- is paid out as dividends.
Senator Jessiman: Of the original, the initial equity?
Mr. Swain: Yes, sir. And when the public offering in 1996 would take place, that would raise $40 million or $39.2 net after issuing costs, and then 10 per cent of that would be paid so the dividend payment rises in that year to $10.7 million and continues thereafter.
Senator Tkachuk: So it is 10 per cent of the equity injection, not of cash flow?
Ms Edlund: It is the equity and investment.
Actually that schedule is a very good one because it reflects where some of our concerns were. If you see at the end of 1995, you really come into a deficit position relative to investment, and unless they were able to obtain the equity injection of the $40 million, assuming everything was well, they would actually at that point and time be deficient. That is even with their operating cash flow as they projected which we were a little concerned about the fragility of some of the assumptions.
Senator Bryden: Yes, thank you. Just to follow through, to go back to page 4, the rental payments to the Crown, which was one of the places where Paxport was significantly superior, could you talk about that please?
Ms Edlund: What they were doing was they were calculating -- and obviously because it is they were calculating in fact to have more operating revenue come through. There was a base revenue that they were paid, and in addition they were, if my memory serves me correct, there was also royalties that would be paid to the federal government.
Consequently, when we looked at it, there certainly was much higher -- assuming that they were able to achieve their forecasts -- revenue flow that would come to the government. That is presuming they could make everything that they had forecasted.
Senator Bryden: That is presuming that they could double their rates on their rental contracts, and that they could significantly increase their airline fees, all the things you covered earlier.
Ms Edlund: Yes, and that they were successful in renegotiating all the contracts.
Senator Bryden: Thank you for that then. Just for completeness on that page, you refer to other related matters, one of them being the exclusivity issue. Do you want to touch on that please?
Ms Edlund: What the Paxport proposal was saying is that unless Toronto airport -- that is with all the new construction having taken place -- unless it was operating totally at full capacity, the federal government would have to sign an exclusivity clause saying that they would not divert any traffic out of Toronto.
We are a little concerned about that one because it is sort of like a monopoly situation in terms of that. It certainly guarantees your revenue streams. We can understand where some concern might come. But, we thought that that should be brought to the attention. There was nothing like that that we saw in the ATDG proposal, but we didn't know -- it was really Transport's call on whether or not in fact they felt that that was acceptable to them.
Senator Bryden: Finally, and this will really amaze the chairman, this is my last question, would you go to page 5, and for the record read in your conclusions?
Ms Edlund: It says:
From all that we have read, it is easy to conclude that the ATDG proposal is much less risky than Paxport's. ATDG's financing proposal is much sounder than Paxport's, its ability to weather any financial storm is greater and its operating forecasts are more conservative.
On the other hand, the benefits in terms of annual rental payments that will flow to the Crown are significantly higher under Paxport's proposal (the weakness, of course, being that if Paxport experiences serious cash flow short falls, the rent may not materialize as anticipated).
Everything else being equal (and we have no way of determining if this is so), Ministers will have a difficult decision choosing between the risks and the benefits.
In summary, while both consortiums appear to be viable, the Paxport proposal is much more dependent on outside financing and operating cash flows, and therefore tends to be somewhat fragile. As a result, from a strictly financial perspective, the ATDG proposal is the stronger of the two.
Senator Bryden: Thank you. Those are my questions, Mr. Chairman.
The Chairman: Very good.
Senator Bryden: Now, Mr. Chairman if I may be excused?
The Chairman: Yes, sir.
Senator Bryden: Thank you. And thank you, both of you.
The Chairman: Yesterday, we heard the testimony of Mr. Lane and his associates who were part of the evaluation team. And they took us through the reasons as to why they came to the conclusion that Paxport was the quote "winner". On the 19th of November, you completed your overview?
Ms Edlund: That was the 8th of November that the report was submitted -- or sorry 9th of November.
The Chairman: I was referring to your report.
Ms Edlund: Yes, our report was submitted to Mr. Swain on the 9th of November.
The Chairman: Yeah, on the 9th of November. On the 15th of January, which I guess would be about two months and a week or so afterwards, Paxport and the Air Terminals Development Corporation signed a letter of intent to enter into a partnership. Did that assuage any of the concerns that you had in your report, or in other words, do you consider yourself sort of a cupid in bringing forward this marriage?
Ms Edlund: I was not involved at all. My assignment in this was strictly limited to two weeks. We were asked to do something.
We did it exactly as you see here, and we totally left it. I never even knew what happened to the report after that point. I was not involved with any discussions, nor was I involved with Transport in anyway.
The Chairman: You were aware -- it was only two months later that they decided to come together?
Ms Edlund: I read the Globe and Mail. That is it. I was not involved whatsoever.
The Chairman: Did you not consider it an obligation on your part to say well now -- did you not discuss it with somebody that this is not a bad idea, this seems to look after some of the things that I referred to in my excellent report?
Ms Edlund: Mr. Swain may be able to answer that more than I. To be quite honest, we were not there with Transport's blessings to go in and do this, to my knowledge of bureaucrats. They did not ask my opinion. I did not know where the report went. I simply dealt with Mr. Swain on it, and I do not think that they would have appreciated me going in there and discussing the situation with them. To my knowledge, they never saw the report. I certainly was not aware of it.
Mr. Swain: Mr. Chairman, I delivered a copy of Ms Edlund's report to my minister, and I sent a copy to Madam Labelle and a copy to the Clerk of Privy Council. Those were the only copies that were made, as far as I know.
The Chairman: Did you have a discussion with Ms Labelle for instance?
Mr. Swain: I'm sure that I phoned her and said, Huguette, "I'm sending it over. You will find it interesting." I cannot remember what I may have said. I didn't have a long, substantive conversation with her about it. I believe I advised her to read it carefully.
The Chairman: I would have thought that the report of the evaluation committee showing that Paxport was the winner -- that the matters contained in your report would seem to indicate that suddenly two months later there is created a marriage between the chosen developer, regardless of how frail or fragile or shaky you may have considered it, with long pockets. Apart from reading the Globe and Mail, don't you take some pride in bringing this marriage together?
Ms Edlund: To be quite honest, I had no idea if we were instrumental or not. I had never read or never was privileged to read any Transport documents. I had no idea what they were thinking. They did not reveal any of their opinions to me during the time we did the exercise.
The Chairman: I understand that. You don't do a piece of work like this with your qualifications and not know that something has happened as a result of it?
Ms Edlund: To be quite honest, I was involved with other things. I mean, I looked at it and I thought well, it is interesting, and you obviously do some speculation in your own mind, but since we never heard anything about it and nobody had said anything -- I mean, Harry has 6,000 people underneath him and I was not going to pick up and the phone and ask what was going on. I just simply left it. I felt if I had to be involved, he would let me know.
The Chairman: Mr. Swain, did your minister, Mr. Wilson, make any comments to you? You talk every day about the result of this merger, didn't he say something to you about --
Mr. Swain: If I recall correctly, Mr. Wilson, in the period before that January announcement, was publicly advocating that the groups might come together. I recall that the impetus for this was his concern about the financial viability of the proposers. Now, he may well have seen that as a quite desirable outcome.
The Chairman: Yes.
Ms Edlund: If I can add one other thing. This was done very quietly because it was very sensitive. Along with Mr. Curran, we were told not to discuss what we were doing. That was one of the conditions, as I understood with Transport as well, so we were really not free to liberally surmise or talk about anything of this nature. It was very much put to us that this was a one-off assignment to go ahead and do this and not to talk about it, so we didn't.
The Chairman: I'm not talking about public. I'm talking about among bureaucrats.
Ms Edlund: The only people in our department who were aware this report was being done, to my knowledge, was Mr. Swain, myself and Mr. Curran.
The Chairman: You just don't want to take yes for an answer. I'm trying to give you the credit for bringing a merger together that seemed to work and you keep modestly denying that you had any part except reading the Globe and Mail. Senator Kirby?
Senator Kirby: Thank you, Mr. Chairman. I just want to pick up on a couple of points, and then I want to turn briefly to your Paxport brief.
Either of you answer because I'm not sure who the appropriate person is. Just to follow up on the Chairman's questions, you commented Ms Edlund on this being extremely sensitive. I guess my question is sensitive to whom? I mean, you were keeping things quiet, I understand you don't want to leak to the public, but obviously it was a sensitive issue within the bureaucracy and I guess my question was who was so sensitive about the fact that someone was attempting to understand the financial competence of the bidders? That does not strike me as an unreasonable thing.
Mr. Swain: Perhaps I could answer that, senator. The matter was of considerable public note at the time. Transport had set up a bidding and evaluation system which they intended to keep as scrupulously fair and above board as possible. That meant strict control of information and so on.
So, a condition of our access to the proposals and the information about the bidders was very strict. It had to be under terms that did not at all threaten the integrity and confidentiality of Transport's process.
Senator Kirby: So it was to ensure the purity, if you want, of the Transport process?
Mr. Swain: Yes.
Senator Kirby: Can I ask you a few questions, Mr. Swain, about the fact that you wound up doing an analysis of another department's projects? I think you and I would agree that is highly unusual in the Ottawa system unless it is a central agency which is doing it. A couple of questions, first of all, did finance also do their own analysis to the best of your knowledge or not? Because normally finance would, or Treasury Board, somebody else would.
Mr. Swain: I do not know what finance or Treasury Board may have done. I don't think it is all that unusual for a minister who is going to be part of some upcoming decision to ask for information about it. This is normally provided through interdepartmental, collegial processes. This is a bit special because there was a very special process going on.
Senator Kirby: It is different from asking for information. It was a separate stream of analysis. It was a second opinion in effect.
Mr. Swain: It was not an evaluation of the whole process. It was focused on a couple of aspects of it.
Senator Kirby: To the best of your knowledge -- you told us in your opening remarks who you gave copies of the report to. To the best of your knowledge, did any of those people give the report to anyone else?
Mr. Swain: I do not know.
Senator Kirby: Do you know whether Madam Labelle gave it to her minister or Mr. Shortliffe gave it to anybody?
Mr. Swain: I do not know.
Senator Kirby: Do you know whether or not it was ever discussed with the Department of Finance or Treasury Board, the two central agencies?
Mr. Swain: I do not know.
Senator Kirby: I would never ask you what you discussed, the contents of any discussion you had with Mr. Wilson, but Mr. Wilson, to the best of your knowledge, got it and read it or at least he knew what was in it?
Mr. Swain: Yes.
Senator Kirby: I wonder then if I could just turn to the Paxport -- what did you call it? The addendum? Because my pages are not numbered. The page that begins Paxport Inc.
Senator Jessiman: Numbered on the bottom?
Senator Kirby: I think that is a document number. Anyway it begins Paxport Inc. at the top and it says "ownership and makeup". The numbers have been erased.
I want to ask you a couple of things. First of all, you have the per cent of equity analysis there. Given at the time you didn't understand where the infusion of Matthews equity was coming from, that it was coming on a loan from Allders. I assume you didn't know that at the time?
Ms Edlund: No.
Senator Kirby: If you had known that, would it change your analysis at all?
Ms Edlund: It seems to me Allders was not all that strong either. It may have changed it, but I would have to take some look at it, but if you look at their own financial position which is I think on the subsequent page, it wasn't awfully strong there either.
Senator Kirby: I understand. I was going to come to that. That is fine. It might have changed it, you are not sure?
Ms Edlund: Yes.
Senator Kirby: At the end of that point one paragraph, you talk about the fact that essentially Paxport has not really a lot of experience in this area. You didn't get off in the financial factors. Again, I realize you were just dealing with financial issues, but given the experience -- and must say that I was impressed with the background having analyzed major projects in both the public and private sector -- how much importance would you normally have placed on previous experience in an area if you were doing an overall evaluation beyond financial?
Ms Edlund: A fair amount, because I think depending on the magnitude of the project or the participants of the project, it goes without saying that one would have to say some experience, or some successful experience. You can have experience which is not successful as well.
Senator Kirby: A lot of us had that.
Ms Edlund: You would expect some form of unsuccessful track record or some assurances that in fact the project would be led to completion. In my experience, I have seen a lot of very optimistic forecasts and the government ends up owning the entire project and I guess we tend to keep that in consideration.
Senator Kirby: So that would have been a factor, the experience issue?
Ms Edlund: Certainly.
Senator Kirby: You then proceed to analyze the financial state of the various players.
You do talk about the Matthews group and you use words -- you say it has barely broken even. It has a current debt load of $250 million at the time. This is at the end of 1991. Overall, how would you characterize the financial state of Matthews?
Ms Edlund: Of Matthews? We felt that they were pretty tenuous at that point and time. If you look at the next page, you see the amount of debt they were carrying at that point. We allude to that in the paragraph that you have referred to.
Basically, we are a little concerned too because given the economic situation at that point and time, we didn't see an awful lot of huge upturn in sort of the business that they were in, so that led us to be a little concerned, and obviously that is borne out to be true.
Senator Kirby: So it was shaky, and you saw no reason to assume things were going to turn around?
Ms Edlund: We could not see any bright light.
Senator Kirby: I wonder if I can move you on to section two. It is over three or four pages. Actually since you did that big table on page 7, since you discussed that with Senator Bryden, I will not repeat that. Can you go on to the next page which is comments on proposed financing?
At the bottom of that page, you say that you think most of the proponents, most of the firms involved in the Paxport proposal will be able to meet their equity commitments, but you then go on to talk about -- you say have some concern about the Matthews group itself, and yet Matthews was the biggest equity player.
Ms Edlund: That's correct.
Senator Kirby: You had some confidence in the partners, but shaky confidence. They were on shaky ground in terms of being the major player, is that correct?
Ms Edlund: That's correct.
Senator Kirby: Normally in the kind of analysis again you have done in both the public sector and the private sector, how big a concern does that ultimately become if you are uneasy about the financial viability of the biggest player?
Ms Edlund: It becomes very important because obviously if the biggest players are unable to live up to their financial obligations, any money that you risk is certainly very much going to be jeopardized or the possibilities are much higher. Similar to the stock market. If you have companies that are unable to or look like they are unable to meet their obligations, the chances are that you are not going to get a very good return. It is certainly a critical point.
Senator Kirby: So you had concern about Matthews itself. And you go on to say further on in that paragraph, you also had concern about the ability to raise the $40 million in equity that the table on the top of that page has. That is obviously a critical piece of this. What was your concern? Was evidence not given to you that said -- you always get letters from brokers saying this is not a problem. We can definitely do it. Underwriters do that all the time.
Ms Edlund: In fact, there was a situation like that. I think there was a letter on file. There would not be too much problem obtaining equity financing assuming their revenue projections were met. I guess that is very right. But, in terms of what our concerns were relative to meeting the revenue projections, that led us to believe it was fairly shaky, and we felt very uncertain, with the limited amount of equity they had in fact into the project, and maybe with promises of 10 per cent dividends that certainly sweetens it, however, if you can't make the cash flow to meet those payments, it does not help too much.
Senator Kirby: On the top of the next page on the dead issue you quote a letter from Wood Gundy which says "Paxport should not have undue difficulty raising the required debt." The phrase "undue difficulty "is not what I would call a ringing endorsement given the way brokers often write letters like that. The use of the word "undue "there sure tempers the enthusiasm for the project.
Ms Edlund: Yes, I think that is right. We wanted to state it that way. Had we not had the letter from Wood Gundy, we would have been even stronger in our report than we were.
Senator Kirby: Stronger negative?
Ms Edlund: Stronger negative in terms of the equity. We felt it is their business however, Wood Gundy's, so it is our opinion against theirs, but we certainly had some concerns.
Senator Kirby: In the next paragraph, which is the one on cash flow provided by operating activities, you say again, and I am just reading for the record, "Paxport has made the heroic assumption that it will be able to renegotiate many of the existing airline and concession contracts." Really unusual to find CA's using words like "heroic" unless they feel very passionately. Do you want to comment on that? How heroic an assumption do you think it was?
Ms Edlund: Obviously we said the words, and so we tend generally when we write a report like this to understate a little bit as we write the report.
Senator Kirby: So "heroic" is an understatement?
Ms Edlund: We felt it was quite aggressive, and it was quite -- I guess just looking at it from our experience, we really thought they were going to have a lot of problems trying to renegotiate them. And also we knew a little bit at the time about the airlines because that was also something we had done a little bit of work on. So, it is kind of tough to look at it.
There was also situations of some of the deals that, my goodness, they were extremely lucrative. There would be no reason I could see the lessee, without a huge pay out, wanting to get out of those leases.
Senator Kirby: And therefore, in fact, the underlying assumption which is detailed in a table on that page where you have the revenue under existing contracts more than doubling by 1997, going from $102 million to $223 million, as you say, why would someone renegotiate a lease unless they were getting something very good in return which will cost you money to provide, I presume?
So therefore, the underlying -- what you seem to be saying, the failure to renegotiate the leases and thereby provide the revenue stream would have caused a serious problem with the whole proposal, is that right?
Ms Edlund: Exactly.
Senator Kirby: I wonder if I might take you over then I guess two more pages. It was an issue that we discussed kind of indirectly yesterday. Was there any indication in any of the discussions that you had as to assuming that these assumptions held together and that therefore the airlines, for whatever crazy reason, agreed to a quadrupling of their rents, of their leases, did anyone discuss what the impact on passengers would be? Ultimately it was going to flow through to the passengers. Was that an issue in any of the discussions?
Ms Edlund: It was one of those stones that if we had been doing a full review we would have looked at. We were only in there for two days. We pulled together the information, taking handwritten notes to pull this report together and wrote the briefing note within a period that was less than two weeks. We could not look at everything.
So we in fact brought those as questions in our working paper, but we could not spend the time to go through and investigate to any great extent. There were several other questions that came to mind, but we really focused on the financial viability simply because of necessity. And yes, there were other questions, but we were not assigned to do that and just simply didn't have the time to.
Senator Kirby: So it is an issue you would have looked at -- had you been doing a complete evaluation of the whole project, it is an issue you would have looked at, is that what I understand you to be saying? Is that right?
Ms Edlund: Definitely. I am of the belief that there is a point that passengers are going to decrease and have a negative impact on your air traffic. That definitely would have an impact on both airlines which was of some concern given the fact that their economic situation was somewhat dubious at that point.
Senator Kirby: Had you be doing a complete review -- are you aware of the fact that the project team told us yesterday, the evaluation team, they didn't look at the impact on passengers?
Ms Edlund: No, I am not aware of that. I'm surprised by it.
Mr. Swain: Senator, if I may, as a reader of that report --
Senator Kirby: Which report?
Mr. Swain: Of Connie's report in 1992, I was thinking about it in terms of efficient economic policy in general, which is one of the businesses that we are in. Terminals 1 and 2 at the time were providing about $32 million a year of surplus into the Canadian airport system.
Senator Kirby: That's the Pearson profit that everyone talks about?
Mr. Swain: Yes. That was thought to be something between $320 and $400 million between 1993 and the turn of the century. And that money was used to support other airports that were not profitable in the system.
Now, ATDG was proposing to pay $160 million in rent. That on the face of it would have left the government or the consumers ultimately to find another $160 to $240 million to keep the rest of the system operating. Paxport's rents would have been much higher over that period. I think they were about $477 million, but the assumptions, as Connie says, were indeed heroic. They depended, for example, on concessionary rentals going from $411 to $811 million over a mere five years.
I felt just as a simple reader of that report that there were likely to be large costs imposed on the general travelling public and on business in Canada were either of these deals to be accepted.
Senator Kirby: Okay. Maybe this is a question I think probably more appropriately directed to Mr. Swain. Was there an analysis done by anyone in your shop on the exact issue you just raised which is let's compare these two proposals with which what I yesterday called the status quo. That may mean improved terminals, but the notion that the government would continue to own and operate the terminals. Because I hear what you just said, that says that from the travelling public's point of view, had that third alternative been on the table, that may have been the best of the three?
Mr. Swain: We did not do such an analysis. As you pointed out earlier, it was not our business. But, it did occur to us as we read Ms Edlund's report.
The Chairman: Could I ask you for clarification on that?
Senator Kirby: Absolutely.
The Chairman: Mr. Swain, you asked him if the travelling public would be better protected under the status quo?
Senator Kirby: The question I asked was -- Mr. Swain in his earlier answer had suggested that there would be -- under this proposal the Government of Canada or the travelling public somehow would have to find a significant amount of money. The question I asked yesterday -- which is normally when you are doing this kind of analysis you have a couple of proposals come in. But you also want to compare whether they are better or worse than the status quo, i.e. the government continuing to own and operate the airport.
The question I asked yesterday was whether or not that option was on the table in Transport, and they told me no, and I just -- since Mr. Swain's group had done it, I asked him the same question.
That is how you understood what I was asking?
Mr. Swain: Yes.
The Chairman: So it hasn't been done in the case of an LAA; or it hasn't been done in the case of a government-owned airport. It hasn't been done in any instances.
Senator Kirby: Sir, we don't know that. We never asked anyone else that. I was only asking about Pearson.
Mr. Swain: That is -- well, you were talking to Transport yesterday. We did not do it.
Senator Kirby: Okay. Ms Edlund, just on your last paragraph on the page before you do the comparisons of the two. In other words, you have a summary paragraph -- go to the page that says "ATDG vs PAXPORT" and go to the previous page. It's the last page of your PAXPORT piece.
Mr. Swain: "Comparison of Key Financial Issues"?
Ms Edlund: Is that the one?
Senator Kirby: I just want the summary paragraph. You have, "Proposed Rental Payments to Crown", and then go to the next page.
Ms Edlund: I am not sure I am with you.
Senator Kirby: That is all right. I am sometimes not with myself. Go back. I have about four -- if you go to the end and you will find your last three or four pages are "ATDG vs PAXPORT". Go to the previous page to that. Okay?
Do you want to just read for the record the bottom paragraph because -- that begins, "As previously noted..." and then I want to ask you a couple of questions about it?
Ms Edlund: Okay.
As noted previously, PAXPORT has made some very optimistic assumptions with respect to the fees it will be able to charge airlines and concession operators. Failure to achieve its revenue forecasts will reduce the amounts payable to the Crown, but, more importantly, serious revenue shortfalls could jeopardize the viability of the entire operation.
Senator Kirby: Thank you. What would have been the consequences of, as you put it, "jeopardizing the viability of the entire operation"? Does that mean it comes back to the government? I mean, what happens?
Ms Edlund: In general, that often has happened.
Senator Kirby: Yes, you and I have both been involved in cases in the past where that has happened in spades, right?
Ms Edlund: Yes. It tends to be a fairly common occurrence.
Senator Kirby: So that what happens is government loses the money up front and still gets stuck at the end?
Ms Edlund: That is correct.
Senator Kirby: I wonder, then, if I can turn you to just a couple of quick comments on the summary -- on the comparison, excuse me, which I guess is a four-page comparison.
Tell me a bit about the management fees, which I guess there is in the table on the third page. The management fees by PAXPORT by the year 2000 are roughly four times -- 2003, to be precise, are roughly four times the management fees being charged by ATDG. In 1998, they are better than three times.
Do you have any -- you have done a lot of comparisons of projects both in the public sector and the private sector -- I mean for governments and in your private sector career. What is your reaction to management fees in the 40 per cent range?
Ms Edlund: I think it goes without saying they seem to be very, very high, extremely high.
Senator Kirby: Even government, I think, would have trouble claiming management fees at the 40 per cent level, even given the public perception of government.
Have you ever seen any up in that range before?
Ms Edlund: To be quite honest, no.
Mind you, one must take in consideration we are not quite sure what they classify as management fees. And we didn't have privy to that. We just took it directly from the proposals as they were submitted. Certain people classify as management fees different things than others may do. We weren't really -- we can only take it as being called management fees that in fact they were management fees. We isolated them.
We thought they were exorbitantly high, yes.
Mr. Swain: Senator, I have seen commercial propositions in very risky high-tech areas and so on which have very high rewards to the proponents, if successful. In an arrangement of this nature, which is much more of a utility financing kind of thing, I have never seen anything like that.
Ms Edlund: Particularly when taken in combination with an exclusivity clause, in terms of revenues that would be generated from passenger traffic going through that airport. That takes it to a much less risky type of an investment, if we can use that, which seems -- particularly in that to be quite high.
Senator Kirby: That makes it much closer to, as Mr. Swain said, a utility in the sense that you have got a monopoly and a guaranteed passenger --
Ms Edlund: Guaranteed flow, that is correct, especially in view of the Open Skies policy that would generate more traffic going through Toronto, and I understand that was under consideration at the time.
Senator Hervieux-Payette: I wanted to know if --
Senator Kirby: Just by way of supplementary, then I have just a couple more questions.
Senator Hervieux-Payette: The 15 per cent, all along, '93, '98, 2003, we have 15 per cent for ATDG, which I feel, according to Mr. Swain, is a more utility type. Usually, it varies between 10 to 15 per cent per cent, around 12, depending of course on the market situation, and we can compare that to, I would say, a hydro deal, not necessarily the oil industry, but I mean the hydro or telephone. I mean if we look at the CRTC return on the investment that they give to Bell, I mean it is a range of 12 per cent. So 15 per cent would be more the -- on the higher level, but the norm, not on the lower scale.
Mr. Swain: Senator, that is correct. Recall that these management fees are over and above the ordinary returns and dividends, profits, and so on and so forth.
Senator Hervieux-Payette: I agree.
Mr. Swain: Fifteen per cent is already very high. I have seen other arrangements in other fields which are probably riskier than this where the management fees vary between about 5 and 8 per cent.
Senator Kirby: I have one last question, which really relates to your last page, which is, "Rental Payments to Crown". What you point out there is that the rental payments to the government are going to be higher, obviously, under one proposal than another, even though you point out repeatedly that the ability to pay those rents has a huge degree of question mark to it. In other words, the ability to pay the rents are heroic and shaky and have a lot of other adjectives attached to them.
Just on reading this this morning, let me tell you the feeling I came away with, and I would like you to comment on it, that the proposal was essentially based on the following kind of logic: It said, number one, we will pay the government a lot of money; number two, we will pay ourselves a lot of money; number three, we will make the airlines pay a lot more money to us so that we can pay ourselves and the government; and, number four, we don't really care what happens to the passengers who will end up paying for it. Is that an unfair sort of a summary in point form?
Ms Edlund: I guess you could summate that way. I never really quite thought about it in those terms.
Senator Kirby: That is all I wanted, Mr. Chairman. Thank you very much.
The Chairman: Thank you, Senator Kirby. I think Senator Jessiman, please.
Senator Jessiman: Thanks. I will direct my first remarks to Ms Edlund.
Ms Edlund, who was the Transport Canadian official in Toronto that you met -- before telling me who it was, was he with you during the whole time?
Ms Edlund: Yes.
Senator Jessiman: Who was that?
Ms Edlund: A fellow by the name of Mr. Keith Joliffe. He was the director, I think at that time, of special projects for Transport.
Senator Jessiman: Right. You are saying that your reviewing the financial viability of the consortiums, and you on your fifth page you have the Airport Terminal Development Group, ATDG, which is the consortium that bid; is that correct?
Ms Edlund: It is one of them. We referred to it consortiums being -- ATDG being one and the other one being PAXPORT.
Senator Jessiman: I want to deal with this one first.
Ms Edlund: Yes.
Senator Jessiman: There is no question, and I don't think one has to spend a lot of time on saying that Charles Bronfman and his trust and the other Bronfman people and the Banque Canadienne Nationale and Lockheed Corporation, although I know very little about Lockheed, I think I would want to see a statement of affairs, and I would probably want to see what they were offering here, which in the case of the trust we are saying that it was over a billion dollars, and you were going to be able to say that they were going to offer it, from what you said, show you the financial statements. So you could certainly satisfy yourself that the Bronfmans had a lot of money.
But this is a limited partnership, and the general partner of the limited partnership, as I understand it from you, is the Airport Terminal Development Group Inc.; is that correct?
Ms Edlund: Yes, that is correct.
Senator Jessiman: You got no financial information in respect of that corporation?
Ms Edlund: It was just a shell corporation.
Senator Jessiman: So it is a shell?
Ms Edlund: Yes.
Senator Jessiman: Can I assume the same for the Toronto Airport Terminals Investors Inc. is just a shell? It is a new corporation.
Ms Edlund: I believe that is correct, yes.
Senator Jessiman: Can I also assume that LAH Limited is just a shell?
Ms Edlund: That is correct.
Senator Jessiman: So what you have bidding here is a limited partnership made up of a general partner that is a shell and two limited partners, because I am assuming the other two corporations that I mentioned, Toronto Airport Terminals Investors Inc. is a shell, LAH Limited is a shell, and so that that particular consortium, although behind it may have billions, and I am sure it has, but at this particular time you didn't get, or at least you haven't said here, that you had commitments from the people that actually have the money to, in fact, invest it and be bound to put the money into those limited partnerships?
Ms Edlund: That is not quite true.
Senator Jessiman: All right.
Ms Edlund: They were proposing to put $130 million equity in.
Senator Jessiman: Who was going to do it?
Ms Edlund: It would be put in by ATDG, so it would be the --
Senator Jessiman: But you just told me a minute ago that ATDG, which is the limited partnership --
Ms Edlund: That is correct.
Senator Jessiman: -- made up of three corporate entities are all shells.
Ms Edlund: Yes, but the shareholders in those corporations would be putting it into ATDG.
Senator Jessiman: But did you have -- I am asking you, you made this review and this is a multi-million dollar thing and you are saying these are the people that get it. All right. Because you know behind it, you know behind those companies they could put it in, if they decided to.
Ms Edlund: Firstly, I didn't say that those were the people to get it because that was not my role to give the recommendation. It was not my role to give a recommendation as to who should win on the Toronto --
Senator Jessiman: I am not asking you -- I want you to tell us, and you have already written it down that what you were trying to find out the financial viability, what I thought you might have said is, "Assuming that the Bronfman family and assuming that the Lockheed Corporation were bound to put in the equity they are saying, then, and only then, is that a viable transaction."
Ms Edlund: Well, their proposal said they were putting the money in, the $130 million in; and then, as well, there was a letter on file from -- I am trying to remember who it was -- saying in fact that there would be no trouble getting the debt -- in fact guaranteeing the debt that could be raised as well through the consortium. So, consequently, that debt would have to be guaranteed by the shareholders.
Senator Jessiman: But you didn't say that.
Ms Edlund: I believe it is in here as a matter of fact.
Senator Jessiman: You show me where it is, where you say -- that is what the brokers said. I read that part. They said as long as they put in the equity, yes, that is what they said, I read it, and you read it out if you wish, that is assuming that Bronfmans and Lockheed put up their share of the equity -- what page, please?
Ms Edlund: It says on page 6, but I am not sure if you are cut off on that or not.
Senator Jessiman: I will see if I have it.
Ms Edlund: It is under ATDG, it starts with "Comments on Proposed Financing".
Senator Jessiman: Right, there is Murray and Co. and Dominion Securities.
Ms Edlund: Yes.
Senator Jessiman: "that, with the equity financing proposed, raising debt of this magnitude should not present any --" that is with the equity financing proposed. That is assuming, and I would have thought you would have said, "Now, wait a minute, we are dealing here with three shell companies," and assuming those people will put in that money and make that commitment to the government, then I think you are perfectly right in what you have said, but I think, subject to that, we are dealing with three --
Ms Edlund: With an RFP, when you are responding to it, you are binding yourself that in fact when you respond that you are going to put that in.
Senator Jessiman: Who was binding whom? The actual proponent is a limited partnership, and you have now told us that that limited partnership has a general partner which is a new company and a shell. It has two limited partners, both limited companies and shells, and you are telling the government that, "Oh, that is fine. Take those shell companies. We haven't anything from them or from their shareholders. We have got something on file, a letter saying if the equity is put in..." Of course, we all agree with that, and maybe that would have happened. But I would have thought you, in looking at this, and particularly being a person in the oil business because I have some familiarity with that, and I assume you are familiar with limited partnerships.
Ms Edlund: Correct.
Senator Jessiman: Anyway, that is just my point, that what we have got here from this consortium is just that, it is a limited partnership and they are three shell companies.
Ms Edlund: The normal circumstances one would not consummate a deal without the money being put in place when that was a response to an R --
Senator Jessiman: But wouldn't you now, knowing what I have said to you, would you not think that you might have said in your report to the government, to your Deputy Minister, "Assuming that those three shell companies have covenants from the shareholders behind the shells and are bound, then this is a better proposal"?
Ms Edlund: Are you asking me a question?
Senator Jessiman: Yes. I am saying if you had to write that again, now, looking at it, and saying, "God, we never considered those -- that these were three shell companies out front."
Ms Edlund: The answer to that is no.
Senator Jessiman: No, you didn't consider it?
Ms Edlund: No, I would not have put that in the letter -- or in the report.
Mr. Swain: Senator, if I may, before one signs up on a deal, of course there is an awful lot of due diligence and there would presumably be shareholders and partnership agreements and so on that tied these corporate vehicles back to their original partners and so on.
Senator Jessiman: Right.
Mr. Swain: Ms Edlund was not writing a report for people who are wholly unsophisticated in financial matters.
Senator Jessiman: No. But also she is not unsophisticated either. She is a CA with lots of experience, experience with limited partnerships. And, anyway, I have made my point.
Let's just really look at the whole thing, and really what we have got here, and I am assuming that you didn't know who the BOAP was.
Mr. Swain: The who?
Senator Jessiman: The BOAP.
Ms Edlund: I still don't know what it is.
Senator Jessiman: Okay. They are the best offer -- let me get the proper -- it is the best offer available project. It is the best one -- sorry --
Senator Kirby: It is the winner.
Senator Jessiman: It is the winner, you are right; and PEC is the one that determined that, and that is the proposal evaluation committee. So the proposal evaluation committee, and I am assuming from what you said earlier that you were not aware at that time that you did this that the best offer was PAXPORT on an overall basis. Do I assume you didn't know that?
Ms Edlund: I had no idea whatsoever because I didn't understand the decision had even been made at that point.
Senator Jessiman: Right. I am not sure -- so you didn't see the evaluation?
Ms Edlund: We saw no Transport documents whatsoever.
Senator Jessiman: So what the minister -- and the deputy to help -- I am talking about Mr. Wilson as well as the other minister, Mr. Corbeil -- what they had to decide here from looking at what you've got, they could get the best of both worlds. If they could get the revenues that PAXPORT was suggesting, and get the same kind of security of people, for instance, if from what you said in your report, I assume that if the -- let me get it here. If CIBC Wood Gundy Capital had gotten a hundred per cent of PAXPORT, that you wouldn't even look into whether CIBC Wood Gundy Capital had or had no money because you must have knowledge that they have more money than is required because you say here:
CIBC Wood Gundy Capital is the merchant banking arm of Canadian Imperial Bank of Commerce and is primarily a broker for funding projects such as this one. No corporate financial statements for this unit were provided to ISTC, (nor are any considered necessary).
So I am assuming -- I know CIBC is Canadian Imperial Bank of Commerce. I know Wood Gundy is a brokerage house. But I don't know CIBC Wood Gundy Capital. Did you? I don't, but maybe you did.
Ms Edlund: Well, it seemed to me they were -- and I am not sure where you are reading off -- they were a minor player in the whole thing.
Senator Jessiman: I will tell you where I am reading. If you go to the top, it says "PAXPORT Inc." It is about, oh dear -- it is the second -- it is following page 7 and then go two pages -- go to seven and then follow on to two and then go down to subparagraph "c) CIBC Wood Gundy Capital..."
Have you got it now?
Ms Edlund: I think one of the things in looking at that CIBC Wood Gundy Capital is not as big of a player. It is a 13 per cent player.
Senator Jessiman: I am not saying that. What my question to you is: If CIBC Wood Gundy Capital owned a hundred per cent of PAXPORT, from your point of view, from what you have said here, you wouldn't even have looked into or didn't think it was necessary for them to provide financial statements.
Ms Edlund: That is not correct. In fact --
Senator Jessiman: What does this mean?
Ms Edlund: If I may, we even asked for certain information that we would have looked at with the Bronfmans that was not -- that apparently was available but only to certain people. To our knowledge, Transport, and I think we say in there Transport or Finance had not in fact asked for it.
If you recall, the Reichmanns had gone down about a year before that. In my opinion, nothing precluded us from looking at financial information, so I tend to disagree with your opinion.
Senator Jessiman: These are your words, aren't they?
Ms Edlund: In this particular case --
Senator Jessiman: No. Did you write that?
Ms Edlund: -- we already had made the case with the Matthews Group being very weak financially, we could belabour the fact and go farther. At this point we didn't feel there was much point in us going any further. So, that is right, we have looked at that, and we have said, look, none were provided; we didn't think it was worth pursuing.
Mr. Swain: Senator, if I may, I think --
Senator Jessiman: That is not the way I read it, but if you say that --
Mr. Swain: -- the point you are going to, I think, is that CIBC Wood Gundy Capital may be in the same sense you were using the word earlier, a shell corporation.
Senator Jessiman: Exactly, and I am wondering why this person who writes this report says in this case, "nor are any considered necessary". I would have thought that they would be very necessary.
Mr. Swain: I understand your concern. But CIBC Wood Gundy Capital has laudable antecedents, as do the corporate vehicles proposed in the other proposal --
Senator Jessiman: But you are dealing with the public of Canada now.
Mr. Swain: The key thing is that this particular group is proposed for only 14 per cent of the equity.
Senator Jessiman: I understand that.
Mr. Swain: There, it is not all that important.
Senator Jessiman: What I was trying to point out and have on the record that the report that was given would indicate that if this particular player, which as you say may have been a shell, that we wouldn't even have to get financial statements and they would be satisfied.
Anyway, let me go onto another point, if I may, and it is my last point.
On the part of your report -- and I am going to tell you now where this one is, if I can. The top of the page is "Debt" and the one prior to "Comments on Proposed Financing" and has to do with PAXPORT; and it was referred to by Senator Kirby previously, and what I would like you to do, if you would, please, and I am going to read it again:
However, included in the proposal package is a letter from Wood Gundy expressing the opinion that, with the proposed equity levels, PAXPORT should not have undue difficulty raising the required ($612 million) of debt.
My question to you is: Is "undue difficulty" your words or are those the words that Wood Gundy used?
Ms Edlund: To be quite honest, I would guess that it might be the words Wood Gundy used, but I don't recall, and we could not take any photocopies or anything, so we just --
Senator Jessiman: So you don't remember?
Ms Edlund: I can't recollect.
Senator Jessiman: There is the odd thing I haven't remembered over the period of years myself. Thanks very much. Thank you.
Thank you, Mr. Chairman.
The Chairman: Senator LeBreton.
Senator LeBreton: Thank you, Mr. Chairman, just to clarify, yesterday, Mr. Lane, who headed up the evaluation committee testified about the very detailed and lengthy process undertaken by his group over the summer of 1992. He emphasized the arm's-length independence of this group and all 10 members of the evaluation committee signed off on the recommendation on August 28th, 1992. The result of their evaluation was that PAXPORT had the superior bid.
Mr. Swain reports that in the fall of 1992 his minister, the Honourable Michael Wilson, asked for information about the financial competence of the bidders. This document which we are discussing today was a result of Mr. Wilson's request and was written by you, Ms Edlund, and signed by Mr. Curran, to Mr. Swain on November 9th. You have already said you produced this after two days' work.
Now, I am just -- this is just a point of clarification.
Senator Kirby: Can we clarify something? I don't think she said she produced it after two days' work. I understood her to say she spent two days collecting the information and two weeks doing the work.
Senator LeBreton: Excuse me.
Senator Kirby: Okay, I just thought we ought to clarify that for the record.
Senator LeBreton: You are right, Senator Kirby, it was after two days of deliberations with the people in Toronto and produced this document; and then, of course, Mr. Wilson's request to Mr. Swain.
Obviously, this was part of the process, and it is not that unusual for a minister to request of a deputy minister additional information; and, obviously, as Senator MacDonald pointed out, even though you don't like to take credit for it, the end result was that we got the best of both worlds. We got the developer in PAXPORT, and obviously the one that you perceived to have the deep pockets in the form of the other group; and, obviously, this was all taken into consideration and, in fact, when the government announced in December, on December 7th, 1992 that PAXPORT, as recommended by the evaluation committee, was the winner, they said, and I am going to read this into the record: "Because of the economic restructuring taking place at Canada's two major airlines the government wants to assure itself that changing financial realities are addressed fully before any construction begins," Mr. Corbeil said.
And then on that same date in a letter that Mr. Barbeau wrote to Mr. Hession, dated December 7th, the same day, I believe, yes, Mr. Hession, President of PAXPORT Management, Mr. Barbeau says -- and I will read this into the record: "We are prepared to enter into negotiations to reach an agreement with the framework of the request for proposal provided that, 1, certain changes required by the minister are made to your proposal in order to accommodate the government's concerns; and 2 --" which is relevant here -- "you demonstrate to the satisfaction of the government by February 15, 1993 that your proposal, in the circumstances, is financable."
So my question is: Is there anything unusual about this whole process? In fact, because of the work of the evaluation committee, because of your investigations and intervention, because of the announcement with the stipulations and then the resulting merger, was there anything unusual about this?
Mr. Swain: Not particularly. And it is to be hoped that the provision of analytic information to ministers in mid-course produces a better result at the end of the day.
Senator LeBreton: You know, the point we had a minister of the then government sending you off on that task.
Mr. Swain: We had a minister who is financially very sophisticated, who had observed many, many business arrangements in his time, who was, I think, concerned about a very large, very long-term undertaking that required serious cash and management capability from the proponents.
Senator LeBreton: Because the taxpayer and the government didn't have any money.
Mr. Swain: Exactly, and wanted to assure himself on that front.
Senator LeBreton: Going back to your earlier testimony, you mentioned about when you were talking about the airlines, did you say that Canadian Airlines was paying four times higher rate to the Terminal 3 group than Air Canada was paying to Terminal 2?
Ms Edlund: I believe that is in my notes here. It is not in the report, but actually it is in the notes of what the higher fee is. I could look it up.
Senator LeBreton: So the question there then is: I suppose anybody that was making a bid was looking at that rate as a potential to charge airlines rather than the reduced rate that was being paid at Terminal 2.
Ms Edlund: That is correct. Both proposals addressed that as well. The ATDG one as well. However, they were going to be looking to phase it over sort of in as their lease expired from our understanding.
Senator LeBreton: And, Mr. Swain, as the Minister of Industry, have you and do you support the concept of privatization? Is this something that you generally support?
Mr. Swain: I think private enterprise is what makes the Canadian economy go round and I fully support the policy of the government of the day.
Senator LeBreton: Thank you.
Senator Tkachuk: I have just a couple of clarification questions. Thanks for coming. It is kind of an interesting report.
Mr. Swain, this was -- this document was -- you mentioned in the notes that Mr. Wilson asked for advice on this matter. So when you talked about your oath just a minute ago -- this is nothing to do with you personally, it has got to do with us getting access to different kinds of information around the government to date. What does that oath mean, your oath to the government?
Mr. Swain: I am sworn to keep secret those things which, in effect, are necessary to the governmental system working. In practice, it means that confidences of the Privy Council and advice to ministers, direct advice to ministers that bears on decisions they are going to take are confidential, are privileged.
Senator Tkachuk: That would normally have been my understanding, and also the excuse that we have been given from time to time as to why we are not getting information.
Now, Mr. Wilson asked for advice, according to your document here, on the financial competence of the bidders to perform the very long-term relationship being contemplated. So, in reality, this is the advice you gave him.
Mr. Swain: I discussed the matter with him also.
Senator Tkachuk: But you would have given him the advice based on this report?
Mr. Swain: Yes, sir.
Senator Tkachuk: So, normally, when a minister would ask for advice, if you couldn't give it to him yourself, in other words, being expert about something or know something that you could directly give him, you would go to the department and then say, "Work something up. The minister really needs this advice on some matter," or you would ask people competent in your department or outside consultants and then this would flow up to the minister?
Mr. Swain: That is correct.
Senator Tkachuk: So what was different about this document from other documents that would flow up to a minister that you would give advice to?
Mr. Swain: First, this was a matter of widespread public notoriety at the time. It was clearly a sensitive topic.
The flow of advice to ministers is in fact large. The Minister of Industry, for example, is a member of a number of cabinet committees. He would get advice from the department on most of the agenda items and so on and so forth. He would get advice on many, many things.
It would be not unusual for half a dozen or a dozen memoranda a day to flow to him, usually short notes on one thing or another.
This was a bit different because of the obvious sensitivity of the file; and also because developing the information required us to get access to a process run by Transport Canada where secrecy and integrity were felt to be absolutely the essence. So it was a bit special in that sense.
Now, the way in which I dealt with the information was not at all abnormal, that is, I provided Mr. Wilson with a copy of Ms Edlund's report and I discussed it with him.
Senator Tkachuk: He may have used this information that you gave him, because this is what he asked for, in Treasury Board meetings, if he was sitting on Treasury Board at the time, I am not sure, but perhaps cabinet meetings.
Mr. Swain: Could have.
Senator Tkachuk: Okay. I still don't quite get it. What is different -- like we have this -- right, this is now a public document, right?
Mr. Swain: M'hmm.
Senator Tkachuk: The advice to the minister you gave was -- is now public basically because this is a document that you based it on.
Mr. Swain: If I may, sir --
Senator Tkachuk: Are there other documents that we could have access to or that the government could provide at the moment that would be like this where they would have asked for information from, like, for example, I don't know if this happened, but you know, Mr. Young could have had his department churn up some information, right, because he asked his deputy for advice on a certain matter, or perhaps the former Minister of Transport, and then this information would be churned up.
You see, I asked questions of Mr. Barbeau and others and they used the question of advice and paper flow to ministers, you know, on a fairly regular basis, and I understand that. I want to know why this is excused and others are not excused.
Mr. Swain: My judgment at the time, sir, and my judgment now, is that factual reports --
Senator Kirby: This is not advice.
Mr. Swain: -- is not advice.
Senator Kirby: It is an analysis.
Mr. Swain: This is an investigative report, if you will. The advice which I delivered to Mr. Wilson personally on top of it, which may have dealt, for example, with what I saw as being the meaning of all this and so on, that would be protected, sir.
The Chairman: Would it have differed from the report of Ms Edlund? I mean where -- I just sort of picked up my ears because it was kind of an interesting exercise that Senator Tkachuk brought up.
Mr. Swain: Yes, it is.
The Chairman: This is -- this would appear to us to be advice to the minister. This would appear to be, and you say it is not.
Mr. Swain: If this concluded with a page that said, "Now, sir, on the basis of this information, we advise you to do this or that, or to undertake these conversations or to make these representations," that would certainly be advice. But it is not. It is not.
The Chairman: I see. That is just the difference, is it?
Mr. Swain: I think that is the essence of the difference. This is, if you will, an expert report on an objective situation and does not itself include advice. It is a report on the facts, as Ms Edlund and Mr. Curran said.
The Chairman: You would think that the parliamentary committee could get any report that it would seek as long as there was missing that line that said, "This is not advice, this is just a factual report," we can get anything we want?
Mr. Swain: Sir, you are now getting into matters in which the Privy Council Office doubtless has deep opinions. Speaking for my own department and my own responsibilities, I would draw the distinction that I describe here.
Senator Kirby: For what its worth, Mr. Chairman, I never talked to Harry about this, but I had drawn the same distinction. That is why when I asked -- I took this to be analysis, not advice.
Secondly, I asked him if he gave the document to the minister and if the minister was aware of the contents; and I deliberately didn't ask him any questions about what his personal opinion had been to the minister on what action ought or ought not to be taken as a result of it. I think that, historically, there has always been a difference between technical analysis, in this case it is financial analysis, and advice.
Senator Tkachuk: I am asking Mr. Swain, not Senator Kirby, the question. You see, I like what Mr. Swain has done, and what I am trying to get at is he made -- he said this is a factual document, and if it had like a page on it of ministerial advice. So in other words, all documents, if you take like -- like sometimes you know it is difficult to get polling information and all kind of documents, and you know they got white-outs, so if you just did this, ministerial advice, that is public.
Mr. Swain: My understanding of the law is that analytic material is available under the Access to Information Act and so on.
Senator Tkachuk: So paper advice, then, that flows to the minister's office, paper stuff, background reports, anything that could be considered analysis and defined as analysis now, from what I understand from you, and what your definition is as Deputy Minister, providing it doesn't have the advice that you personally gave the minister is a public document?
Mr. Swain: I stand to be corrected by my seniors and betters in the Privy Council Office and the Department of Justice, but that would be my interpretation.
Senator Tkachuk: What if they said you shouldn't have given this out? Or did you ask them permission?
Mr. Swain: I didn't ask them.
Senator Tkachuk: You didn't ask them?
Mr. Swain: My understanding is that the copy of this document that came to this committee came from the files of the Privy Council Office. It was a copy of the one that was provided to Mr. Shortliffe.
Senator Tkachuk: It came from the Privy Council Office, this document itself?
Mr. Swain: Yes, I think that is how it came to light.
Senator Tkachuk: So you didn't release it?
Mr. Swain: No.
Senator Tkachuk: So the PCO said --
The Chairman: No, the Department of Justice.
Senator Tkachuk: The Department of Justice released this.
Okay, so we could now ask for other documents that may flow both between -- you know, my view would be if we are doing this inquiry there should be -- I would gather there is all kinds of documents flowing around between officials and ministers that we now could get access to providing they tear a page off that has got any ministerial advice to it because, you know, that would be a problem. We should be able to get all those documents, you know, up to now, I would think, eh?
Mr. Swain: That is an interesting thesis, senator.
Senator Tkachuk: I thought it would be.
Senator Hervieux-Payette: You don't have enough so far?
Senator Tkachuk: I have lots of -- we have lots of documents. I just find these that flow to the minister's office a little more interesting to read.
Questions on the report itself. You mention in here that Lockheed Corporation didn't provide you with any information.
Ms Edlund: No.
Senator Tkachuk: How big of a partner were Lockheed Corporation?
Ms Edlund: They had a fair amount. We knew a little bit about Lockheed already because we did a lot of aerospace projects within the area of analysis of aerospace projects, so we had a bit of an idea on Lockheed.
Senator Tkachuk: What kind of an idea on Lockheed?
Ms Edlund: Well, Lockheed -- I mean similarly with Mcdonnell Douglas Corp., Hughes, whatever else, because we were involved in that aerospace, we have a fair idea of where they stand financially.
Senator Tkachuk: So were they healthy? Did you know what their debt to equity ratio was?
Ms Edlund: Yes. There was no big problem that we could see with Lockheed.
Senator Tkachuk: Lockheed itself?
Ms Edlund: Yes.
Senator Tkachuk: But you didn't analyze it. You don't know. I mean, there is a lot of big companies that -- Lockheed just a number of years ago experienced serious financial trouble.
Ms Edlund: We were dealing with them fairly currently though.
Senator Tkachuk: What I am trying to get at here is you do a comparative analysis and you have a shareholder, and let me ask that question again: I think I am not sure if I know the answer to it but I want to know if you know the answer. What was the percentage of Lockheed's participation in the proposal group?
Ms Edlund: It is right at 19, I think it is 19 per cent. It is right in the org chart that we have at the front.
Senator Tkachuk: So they are a fairly --
Ms Edlund: They had a hundred per cent ownership of the limited partner that was being put in, and that meant that they were in 19.9 per cent.
Senator Tkachuk: Were they in directly or were they in with a shell corporation?
Ms Edlund: A shell or a vehicle that was used, which is very common. This always happens.
Senator Tkachuk: Of course it is. They had Lockheed Corporation and then there was another company which was their investment company that they were going to participate as a partner in the proposed company.
Ms Edlund: Yes, that is correct.
Senator Tkachuk: Okay, so you did a comparison between one group, one company, and another company, but yet 20 per cent of the information was missing on the other company. You had no information -- you admit -- you say in here that you don't have any information.
Ms Edlund: I guess the other way of looking at it is 80 per cent of the information of the other shareholder was available so we are only missing 20. If we look at PAXPORT in terms of what we were missing, and didn't look at, we certainly looked at less, I guess, even in cases of some of the very minor shareholders within the consortium. We felt fairly comfortable with Lockheed because we have done a lot.
Senator Tkachuk: Twenty per cent is a fairly major group, eh, because it is only 13 per cent less than Matthews had.
Ms Edlund: That is true, if you look at it -- you have got the Bronfman group with 80 per cent, but again we had some knowledge of Lockheed.
Senator Tkachuk: Let me ask you another question. Did Matthews itself have any history of not completing projects?
Ms Edlund: We looked at public statements in terms of what were available.
Senator Tkachuk: I asked a question.
Ms Edlund: The answer to that is no.
Senator Tkachuk: Did they have a history --
Ms Edlund: No.
Senator Tkachuk: -- of not completing projects?
Ms Edlund: No.
Senator Tkachuk: They completed all the projects?
Ms Edlund: No, and they had never actually reported a loss either.
Senator Tkachuk: You mention that they never reported a loss except for two years where they broke even and they had some debt and that was of some concern to you. Do you know what Lockheed's debt was?
Ms Edlund: I can't recall now. It is two and a half years.
Senator Tkachuk: What about Bronfman's debt?
Ms Edlund: We tried to look further at reports. One of the problems was in a trust, and in fact we had a letter on file, we do have some of it --
Senator Tkachuk: You see, I don't mind -- like this is a pretty good report and it actually makes interesting reading. But it is -- actually, in a way, it is kind of fun to read considering that, you know, there was some politics in this and one minister wanted to check out what was happening in another department. But to me it is not a very valid -- I shouldn't say it is not a very valid -- it just makes interesting reading, but it is not a very valid document. There is too many things missing here.
Ms Edlund: Actually, if I can interject, Mr. Swain brought it to my attention. It is hard to remember after two and a half years. In fact, we do have the information on Lockheed. In terms of their annual sales covered for the five years ended December 31, 1991 of average $10 billion U.S. and U.S. 300 million respectively. As at December 31, 1991, which would have been, what, eight months previous to the report being issued, Lockheed had cash of $266 million; term debt of $1.4 billion; and shareholders equity of $2.5 billion.
Senator Tkachuk: Did they put a letter up saying that they would guarantee anything or anything like that?
Ms Edlund: We didn't see that. We didn't go through to look at that because recognizing we had a certain amount to come out with we did as complete a job as we could to give the information we were required to give.
Senator Tkachuk: Let's go to that -- what page is that diagram here? Lockheed, LAH Limited or Lockheed Air Terminals Inc., you had no statements on them?
Ms Edlund: Correct.
Senator Tkachuk: But aren't they the ones that were the partners in the company; they were the legal entity?
Ms Edlund: But they were created specifically for participating in ATDG.
Senator Tkachuk: How far could you go back on this? My point is on this thing is you have to compare apples to apples and not apples to oranges here, and I think that you do that, because you have no idea what is behind Matthews.
Ms Edlund: Yes. We had financial statements, full financial statements and they were fairly significant.
Senator Tkachuk: Of Don Matthews personally?
Ms Edlund: We actually did some work on Don Matthews --
Senator Tkachuk: On his partners?
Ms Edlund: It is possible to scan certain things like that, yes.
Senator Tkachuk: Were they here?
Ms Edlund: No, they are not there.
Senator Tkachuk: When did you do this?
Ms Edlund: We do it by computer very quickly in our office. You can scan -- it is amazing what you can scan.
Senator Tkachuk: Where would you get that information on personal wealth?
Ms Edlund: You get information off InfoGlobe. It would not be personal in the sense that it is not published. But it is amazing what you can put together by looking at public documents.
Senator Tkachuk: But you don't make any reference to that here whatsoever.
Ms Edlund: No, because that is just part of our course of operation.
Mr. Swain: Senator, if I may interject one point on this? The structure of the limited partnership, ATDG, is not an unusual one. In any bidding procedure the partners have to promise that what they are saying on paper is in fact true and so on and so forth. Before anybody would actually sign up for anything worth this many millions of dollars there would be weeks and weeks of due diligence by teams of accountants and lawyers to make sure that the shareholders' agreements were exactly as -- that it was all kosher and so on. And I think it is fair to say that Ms Edlund and Mr. Curran in the short time available assumed that what these folks were saying was true.
Senator Tkachuk: Okay. I have just a couple of questions left here. It is just they took a little longer than I thought.
You mentioned that there will be an assumption made that the Matthews Group will have, you know -- you worry about whether they will be able to renegotiate some of the contracts because of an increased rate, increased charges that they would have. After they were told that based on -- that they won the proposal -- not that they got the contract because remember December '92 -- then they had to negotiate a deal with Air Canada. Were you aware of that?
Ms Edlund: I am sorry, I --
Senator Tkachuk: You mention that they are going to have to renegotiate contracts with Air Canada and other -- and then other users of Terminals 1 and 2.
Ms Edlund: That is correct.
Senator Tkachuk: But then Matthews Group, after they said that they got the contract based, you know, pending financial things that have to be done, as is done in most contracts, didn't they negotiate after that in 1993, they negotiated a contract?
Ms Edlund: To be quite honest, I have no idea because, as I mentioned before, we never followed it.
Senator Tkachuk: You lost interest in this matter once this was done?
Ms Edlund: I wouldn't say we lost interest, but it was limited to reading The Globe and Mail because we weren't privy to anything to do with Transport at all.
Senator Tkachuk: Correct me if I am wrong, but I believe they did negotiate a contract with Air Canada.
Ms Edlund: Did they?
Mr. Swain: Okay.
Senator Tkachuk: Yes, they did.
Senator Jessiman: They did.
Mr. Nelligan: We will be hearing that from Air Canada next week.
Senator Kirby: I am not disputing that.
Senator Tkachuk: Senator Kirby, sometimes you have little speeches that don't exactly -- but I am telling you right now that they did, I believe they did.
Senator Kirby: I wasn't disputing that. I was saying we didn't have it in evidence.
Senator Tkachuk: If they did, which I believe they did, that would have been a heroic feat?
Ms Edlund: No. I didn't actually say that.
Senator Tkachuk: Yes, you did. You said if they didn't -- if they did, it would be heroic, and I am just saying that they did. If they did, would that have been a heroic feat?
Ms Edlund: I can't comment. I am not even aware of the circumstance, or if it was.
Senator Tkachuk: You know, Senator Kirby just asked you that, and you just answered that a minute ago and now you don't remember. You said it would be heroic. If they were able to renegotiate existing contracts with Air Canada and other concession -- "made the heroic assumption that it will be able to renegotiate many of the existing airline and concession contracts".
Ms Edlund: There was some other very interesting ones in there other than Air Canada as well.
Senator Tkachuk: I got one more point to make. This management fee bothers me.
Senator Hervieux-Payette: Us too.
Senator Tkachuk: It bothers me because I know the assumptions here -- I am having difficulty with some of the information and then the assumptions they reach. When you say 41 per cent management fee --
Ms Edlund: Forty-two.
Senator Tkachuk: -- what does PAXPORT include within the management fee?
Ms Edlund: That is what I mentioned. We took it strictly from their own forecasts where it said, if I am recollecting correctly, was directly from their own forecasts where they defined it as a management fee or we picked it up.
Senator Tkachuk: Did it include interest payments?
Ms Edlund: I would doubt it.
Senator Tkachuk: I am asking you. You are supposed to know this.
Ms Edlund: Normally, it would not. I don't know. We couldn't go through that. We defined what we picked out as management fees that were actually called management fees in their proposal. We couldn't go through, and that is why I did qualify that in saying that some people might --
Senator Tkachuk: Was it based on gross -- what did you base the management fees on?
Ms Edlund: We took it directly from their financial forecasts and what they submitted in the RFP.
Senator Tkachuk: You didn't know what it meant or what it included?
Ms Edlund: It would include management salaries, so on and so forth.
Senator Tkachuk: Would it include all management operating costs?
Ms Edlund: It wouldn't include operating costs. It would be management.
Senator Tkachuk: Sometimes it does, that is why I am asking. Sometimes a contract has a 15 per cent management fee of gross revenue, and that 15 per cent management fee would be -- would include some salaries, management salaries, sometimes accounting fees, sometimes not. It may include interest costs. It may also include total operating costs. I don't know that, but I am asking you if you know that.
Senator LeBreton: I guess they assumed again.
Senator Tkachuk: Or was it just an assumption?
Ms Edlund: No, it was called management fees.
Senator Tkachuk: I know that, but what did it include?
Ms Edlund: We did not question PAXPORT because we didn't have access to question the participants of PAXPORT on it. So we took it from what they have classified as management fees.
Senator Tkachuk: But you see you have a 41 per cent management fee that one group --
Ms Edlund: Forty-two per cent.
Senator Tkachuk: -- that one groups puts right in their -- they put it right in their proposal. They didn't try to hide it or anything; right?
Ms Edlund: Yes.
Senator Tkachuk: And then you have another group that puts 15. You say one is excessive and one is not, but you don't know what it includes.
Ms Edlund: We know what they called it. Normally, I would call anything that is a management fee --
Senator Tkachuk: Okay. What do you think a management fee is?
Ms Edlund: What do I think a management fee --
Senator Tkachuk: Yes.
Ms Edlund: It does not include interest, nor does it include capital costs. It includes normal management in terms of operating -- it could include for operating; it could include for parking; it would include for basically salaries and operating costs of management staff.
Senator Tkachuk: Whose salaries?
Ms Edlund: Of your management staff.
Senator Tkachuk: All of your management staff and all of their expenses, possibly?
Ms Edlund: Potentially it could have some of that in, yes.
Senator Tkachuk: As you say, you don't know whether it includes interest fees either, it could include --
Ms Edlund: I have never seen management fees include --
Senator Tkachuk: I didn't ask that. You don't know what is in the 41 per cent.
Ms Edlund: They could have put anything in there.
Senator Tkachuk: You know, ma'am, this is really important to me because I kind of like this report. It is a very interesting report. It was done for the government and advice was given to the minister based on this report.
I hold my politicians in high regard, and so I want to make sure they got good advice. I am saying: You don't know what that 41 per cent included.
Ms Edlund: I am saying that I know it is management fee as presented by PAXPORT. If PAXPORT called it management fee and included interest or other abnormal management fee costs, then, fine. But I wouldn't think that would be --
Senator Tkachuk: What I am trying to get at here, and Mr. Swain help me if I am wrong, you don't know what the 41 per cent is. You don't know what the 15 per cent is. And you haven't got it broken down so you can't say that one is excessive over the other because you don't know what it includes.
Mr. Swain: In an absolutely strict sense, you are quite correct, but senator --
Senator Tkachuk: Thank you very much. That is all I want to know.
Mr. Swain: This is a generally accepted term of art in the accounting world. Management fees include the salaries and expenses and so on paid to the managers of a project. It doesn't include all of the other costs of debt and equity and so on and so forth.
Senator Tkachuk: The only thing I know about finance, and there is always an exception to every rule, Mr. Swain, and so that is all I am asking.
Mr. Swain: And the second thing is that it would be extraordinary to find any proponent attempting to show a much larger management fee than they needed because that usually attracts attention. Now, this was specified in terms of a proportion of the total payroll to run the airport that would go to the manager.
Senator Tkachuk: Okay.
Mr. Swain: And it was specified in the same terms for both bidders.
Senator Tkachuk: Okay. So the total costs were --
Mr. Swain: For one were 15 per cent of total payroll; and the other were 42 per cent for the payroll by the year 2003.
Senator Tkachuk: What were the total costs of one compared to the other, the total operating costs of the airport?
Mr. Swain: The ATDG proposal was $15 million in the year 2003; and the PAXPORT proposal was $25.7 million in the year 2003. In that year, the management component of the ATDG proposal was $2.3 million; and the management part of the PAXPORT proposal was $10.9 million.
Senator Tkachuk: So?
Mr. Swain: So.
Senator Tkachuk: It covered a lot of stuff and we don't know what it covered.
Mr. Swain: But any standard accounting textbook will tell you what you should expect.
Senator Tkachuk: I know that and we will have an opportunity to ask them. I just wanted to make sure if you had numbers. I think I have overdone my welcome, chairman.
The Chairman: I think the matter has been ploughed.
Senator Tkachuk: Yes, it has been ploughed. Thank you very much. Thanks witnesses.
Senator Kirby: I have only one question, just a very short one just to finish off on a point with Mr. Swain.
You gave the document to two of your fellow colleagues who were deputies, one being Huguette Labelle in Transport, and one being Mr. Shortliffe, Secretary to the Cabinet. Did you ever get any, I guess I will call it, feedback from them on it, from either one? In other words, reaction, comment? As opposed to necessarily asking you what they said I just want to know if you ever got --
Mr. Swain: Not that I recall.
Senator Kirby: To the best of your knowledge did they read it?
Mr. Swain: I can't say whether they read it. But my recollection is that when I sent it to them I also phoned them or had a word and said, "Hey, it's coming, it's worth reading," or something like that.
Senator Kirby: We can ask them about that. Thank you, Mr. Chairman.
The Chairman: All right. Colleagues, I think Mr. Nelligan has a few questions.
Mr. Nelligan: I think you have both explained your position exceedingly well, and I have no further questions. Thank you very much.
Senator Hervieux-Payette: A simple question. Since you were part of several privatization transactions, I mean, were you aware of the evaluation of the other because since you went to Toronto and spent two days with the evaluation team, were you aware of the similar procedure that was done for other proposals made to government in the privatization exercise of -- lockup type of evaluation process?
Ms Edlund: Do you mean the one carried out by Transport --
Senator Hervieux-Payette: The other one that you were participating in. Was it the only one that you have seen that was going through a process like this one?
Ms Edlund: No, it is very common because you are dealing with proprietary information and that is where the concern is. You are dealing with information that is critical. The same thing would happen if you were dealing with airlines or dealing with a Petro-Canada issue or whatever. It's common.
Senator Tkachuk: Mr. Chairman, I missed something. You said you missed with the evaluation team. Did you meet with the evaluation team?
Ms Edlund: We met with the evaluation team on October 21st to say that we were going to do this and could we have access. That's the only time I ever saw anybody on this evaluation team. I think there was a Mr. Lane and a Mr. -- is it Dixon?
Senator Tkachuk: That was just to get permission, but you didn't meet with him about this --
Ms Edlund: And then they turned it down, and then it went through the deputy. The only other person we met with was Mr. Joliffe when we went to Toronto with him, and that was it.
Senator Hervieux-Payette: Thank you.
The Chairman: Ms Edlund, Mr. Swain, thank you very much for your assistance and your forthcoming replies. And Ms Edlund, I hope you won't be as busy in the future as you have been in the past.
Thank you so much.
The committee adjourned until 12:30.
---------------
Ottawa, Thursday, July 27, 1995
The Special Senate Committee on the Pearson Airport Agreements met this day at 12:30 p.m. to examine and report upon all matters concerning the policies and negotiations leading up to, and including, the agreements respecting the redevelopment and operation of Terminals 1 and 2 at Lester B. Pearson International Airport and the circumstances relating to the cancellation thereof.
Senator Finlay MacDonald (Chairman) in the Chair.
The Chairman: We'll bring the meeting to order.
Now, we have recalled Mr. Michael Farquhar because of the need to clarify some matters that came up in the evidence of two days ago. Mr. Nelligan will explain what the reason for this is.
Mr. Nelligan: Senators, at the hearing on Tuesday when Mr. Bandeen was in front of us, you may recall that he referred to a resolution of the Region of Peel Council. It appears at page 1615-31 where he suggested that Peel council had endorsed the formation of the local airport authority.
It would appear that that endorsement was conditional, but we weren't aware of that at the time and I believe that Mr. Farquhar can help us on that.
In addition, he referred to a letter which it appears he received when he was being briefed, or a copy of a document, and he suggested that it was a letter drafted by Mr. Farquhar for the minister's signature and that he had never received it from the minister.
We were concerned at the time as to whether or not that was under the stricture of being advice to the minister because it was attached to a report from Mr. Farquhar to the minister. Since it has now become public, we felt that it was better to have Mr. Farquhar back to explain the circumstances surrounding that letter and the conditions which were imposed upon it.
Can you give us some help on that, Mr. Farquhar?
(Michael Farquhar, previously sworn)
Mr. Michael E. Farquhar, Director General, Airport Transfer, Transport Canada: Thank you, Mr. Nelligan, Mr. Chairman, committee members. I did not bring my own DNA expert this afternoon, so hopefully the testimony will be somewhat shorter.
I would like to deal with the issue in two parts, one with respect to the resolution issue, and, two, with respect to the letter in question.
At the outset, as Mr. Nelligan mentioned, the draft correspondence has become public through this committee. Senator LeBreton alluded to this on Tuesday evening, and I can only agree with Senator LeBreton's comments that -- and Mr. Nelligan's, that that particular documentation was and should have been considered as advice to the minister and normally would not be made available publicly. But, given that it is, I will be glad to deal with it.
With respect to the resolutions themselves, I will take a few minutes to go through sequentially the passage of the resolutions by the different entities. And I am going to deal specifically with Mississauga and the Regional Municipality of Peel, of which Mississauga is a part. And if you don't mind, with your permission, I would like to refer to specific correspondence and dates just to give the chronology.
In a letter of March 2, 1993, from Mr. Meinzer, who was the interim chairman of the authority pro tem at that time to the Honourable Gilles Pouliot, Minister of Transportation for the province of Ontario, there was a report attached dated March 1, 1993, which reported on the status of each of the different Toronto-area municipal and regional government's resolutions.
And I will refer very specifically to the City of Mississauga which, at a meeting of February 7, passed the following resolution. You probably have most of this documentation, but, for the record, I will just repeat it:
Whereas the Region of Peel Council passed a resolution on November 26...endorsing the formation of a Local Airport Authority for the Greater Toronto Area pursuant to a report dated November 19, 1992, from Emil V. Kolb, Chairman, Region of Peel, titled, "Regional Chairmen's Task Force on establishing a Local Airport Authority";
And whereas the report was referred to the City of Mississauga, the City of Brampton, and the Town of Caledon for comment on representation on the Local Airport Authority, and any other related issues;
Now therefore be it resolved that Mississauga City Council support the establishment of a Local Airport Authority for the Greater Toronto Region and endorse the recommendations in the report --
-- on establishing a local airport authority. And I believe that report came forward and recommended the establishment of an authority. That was Mississauga's resolution.
Mr. Nelligan: And that is the resolution that Mr. Bandeen read into the record two days ago.
Mr. Farquhar: I believe that is correct, yes.
On November 26, 1992, the Regional Council of Peel passed a resolution that it endorsed the formation of a Local Airport Authority and further that the report of the regional chairmen be received.
At its meeting of Thursday, February 25, 1993, the Council of the Regional Municipality of Peel -- remembering that Mississauga is a member of that regional council -- adopted the following recommendations and a report of the regional chairmen. They reiterated their support. But then they made an amendment of Recommendation 7a), which I believe was the recommendation endorsing the authority concept. That was Recommendation 7a) in the Regional Chairmen's Task Force report to include the transfer, "...primarily and firstly Lester B. Pearson International Airport and Toronto Island Airport together."
So that's where that resolution in February came together.
Then in a letter to the Honourable John Corbeil, federal Minister of Transport, dated May 19, 1993, the Regional Municipality of Peel Chairman, Emil Kolb, wrote the following:
The following resolution was approved by Regional Council at its meeting held on May 13, 1993:
And I quote:
That the Greater Toronto Regional Airports Authority be advised that the Region of Peel strongly opposes the transfer of the Lester B. Pearson International Airport without assuming at the same time the Toronto Island Airport, as it is contrary to the Region's Resolution 93-75-1 approved on February 25, 1993 stating:
The Local Airport Authority (LAA) must have as its initial and primary focus the orderly transfer of those airport facilities that are currently under Transport Canada jurisdiction and subject to the Federal airport transfer policy; this to be primarily and firstly Lester B. Pearson International Airport and Toronto Island Airport together.
So that was November 25, 1993.
Then in a letter of June 15, 1993, from Robert Bandeen, who was then the chairman and president of the Greater Toronto Regional Airports Authority, to our minister, John Corbeil, he stated on page 2 of this letter:
The City of Mississauga passed a resolution (February 17, 1993) supporting the establishment of an LAA, and endorsing the recommendations in the report of the Chairman of the Region of Peel. On November 26, 1992 the Council of the Regional Municipality of Peel endorsed the formation of a local airport authority for the Greater Toronto Area. These resolutions remain in effect. I requested the Council of the Regional Municipality of Peel to confirm its endorsement of the GTRAA by passing the clarifying resolution as I requested all five Regions and the three key Municipalities.
That'd be the City of Toronto, Mississauga and Etobicoke.
The matter has been considered by that Council but was deferred without a vote, as a result of the current controversy surrounding the runway expansion at [Lester B. Pearson International Airport] and the Toronto Island Airport.
So at that stage, the request for a clarifying resolution had not been received. This letter was dated June 15 and, as I will comment in a moment on the draft letter, there had been some expectation that a resolution of some sort would have been coming forward around June 24. And to the best of our recollection and in checking through all of my records and files, we have no record of any such subsequent resolution having been received. And I think, when I refer to further correspondence in a moment, that will confirm that.
That is the sequencing of the resolutions themselves. I hope that clarifies that particular aspect of it.
If I could go on to the issue of the memorandum -- and the document we are referring to, which includes a briefing note to the minister, has a short route slip signed by me. It is dated June 18, 1993, and it was sent to Huguette Labelle who, at the time, was the Deputy Minister of Transport, with a copy of the route slip and attachments to Bill Rowat who was the Associate Deputy Minister of Transport at the time.
On this route slip, I had said:
Further to our short discussion of yesterday at TMX --
And TMX is the management board for Transport Canada, chaired by the Deputy Minister and includes the assistant deputy ministers and other senior officials --
-- regarding the above --
This was the Toronto LAA recognition.
- - attached please find a copy of the June 15, 1993 letter of Dr. Bandeen to the Minister --
- - which I think you have --
- - with our proposed draft reply as well as a briefing note for the Minister.
And the briefing note for the minister is what would come under, normally, a ministerial confidence and normally would be restricted from public distribution.
Attached to that covering note was the briefing note. It was a three-page note. It is dated June 18. And I will refer simply to the last paragraph because I think that is the one that is pertinent:
Attached please find a proposed reply to Dr. Bandeen's letter of June 15, 1993. The draft reply should be finalized only after the receipt and review of the upcoming June 24, 1993 resolution of the Regional Municipality of Peel. Even if the Regional Municipality of Peel reconfirms its former resolutions on the proposed Toronto Island Airport transfer --
In other words, including that at the same time.
-- it would still be appropriate to endorse the GTRAA in light of our recent experience in Edmonton.
The Edmonton issue -- and Senator Kirby, you alluded to that -- although Edmonton has two airports, only one of which is operated, or was, by the federal government, it has a city airport which was operated by the City of Edmonton. And the authority at the time was endeavouring to negotiate the transfer of both airports together. And that became a very complicated initiative for the authority because its principle raison d'être was to become the operator of the major federal airport.
And it certainly, I think, in retrospect from the authority's point of view, it probably makes more sense to take over and demonstrate your ability to operate the major airport first and foremost, rather than trying to do it all at once.
So that was the reference there. And the minister was very familiar with the Edmonton situation.
The draft letter which was dated June 18 says, in paragraph 3:
I am, therefore, pleased to officially recognize the GTRAA as the official representative of the Greater Toronto Region for purposes of pursuing airport transfer discussions/negotiations with departmental officials...
So that was the document that we were referring to.
Now, I cannot personally state with any certainty whether in fact that particular documentation was actually received personally by the minister or whether it stopped at the deputy minister's level. I don't think it's particularly material at this point in time, but I cannot vouch that the minister in fact did receive it.
Now, what did occur, however -- and that again, was June 18 -- the minister, on July 8th, met with Dr. Bandeen, July 1993. And on July 9, the minister met with Mayor McCallion of Mississauga pursuant to the issues that were under discussion.
And so what my interpretation would be is that the minister had concluded that, rather than sending the proposed letter which was in reply to an earlier letter, he chose to discuss the matter directly and personally with the mayor of Mississauga and with Dr. Bandeen, which of course is a ministerial decision. That was his choice and he pursued that. We had proposed certain courses of action and he chose to do this.
Subsequently, he wrote to both Mayor McCallion and Robert Bandeen on August 11. And I think these letters are pertinent as well. These letters are following the meetings that he had with the two individuals and, in a sense, were follow-ups and responses to earlier correspondence. This is dated August 11, 1993, and is signed by John Corbeil.
In this letter, he says:
In our discussion concerning the Greater Toronto Regional Airports Authority...I indicated to you that I felt that there was a need for a clearer indication of support from the City of Mississauga for the LAA. More specifically, I would reiterate my request to you that you seek a new resolution from your Council which would give unconditional support to the GTRAA, hence withdrawing the requirement in your present resolution for a parallel transfer of the Toronto Island Airport. With such an unconditional resolution I would be prepared to endorse the Local Airport Authority.
Such a resolution would in no way preclude the GTRAA in the future from pursuing transfer discussions on the Toronto Island Airport with the appropriate parties.
He sent a similar letter to Dr. Bandeen, essentially saying: I met with the mayor of Mississauga and this is what I discussed with her and what I told her. That was essentially a for-information letter.
On August 18, 1993, Robert Bandeen wrote to Minister Corbeil and stated with respect to whether it was Mississauga or the Regional Municipality of Peel:
In fact, the City of Mississauga has given its unconditional approval to such a transfer, a copy of which is attached.
That goes back to the February and November resolutions, which was a resolution endorsing the recommendation of the regional chair who happened to be the regional chairman for Peel.
That resolution was subsequently amended by the regional council to put on the linkage with the Toronto Island Airport. So that is what modified, in effect, the Mississauga resolution.
Robert Bandeen went on to say:
The directors of the GTRAA understand --
And this is dated August 18.
-- that the Mayor of Mississauga is not prepared to support the revision to the resolution you requested as she would like both LBPIA and the Toronto Island Airport to be contemporaneously transferred to, and operated by, a local airport authority.
That was August 18.
And then finally, on October 7, 1993, which is getting close to other important events, Minister Corbeil wrote to Robert Bandeen and commented again about the issue of resolutions, and said:
None of this --
- - discussion with respect to getting on with the recognition --
- - however, detracts from my request for unconditional resolutions of support for the Toronto LAA from the principal local governments in the Toronto area, including the City of Mississauga and the Region of Peel.
That was dated October 7, 1993. So I think it is clear, in terms of the position of Mississauga, and indeed Peel, is that throughout the entire exercise, there continued to be that linkage of doing the two airports together. And, as you can see from the minister's correspondence, it was his view that he wanted a clear and unequivocal resolution dealing only with Pearson.
That I think, ladies and gentlemen, is the chronology, as best I can reconstruct it.
Mr. Nelligan: Just to clarify, in your letter -- rather, your memo to the minister, you say it should be finalized only after review of the upcoming June 24, 1993 resolution of the Regional Municipality of Peel.
Was any resolution of any kind ever received by your department from Peel relating to T1T2 -- or rather, to Pearson, after the date of your memo.
Mr. Farquhar: I'm aware of no such resolution having been received or, indeed, passed. I think the subsequent correspondence would indicate. If indeed there had been a resolution passed, it would have reiterated the continuing linkage of the two airports for being transferred contemporaneously.
Senator Jessiman: Could you look at page 2?
Mr. Farquhar: Of?
Senator Jessiman: Of whatever you call this. Route slip?
Mr. Farquhar: Of the briefing note? Okay.
Senator Jessiman: The top where it says current status, last paragraph?
Mr. Farquhar: Yes.
Senator Jessiman: Could we really, with your explanation, say that that also was subject to getting clearance from Peel and Mississauga?
Mr. Farquhar: Which part, senator?
Senator Jessiman: You say that, in terms of the criteria applied to the first four LAAs, as well as to the Winnipeg LAA, it is the view of the departmental officials -- that is you people, I assume -- that Toronto LAA has met not only the requirements of the airport transfer process, but also satisfied the subsequent demands sought by the Minister of Transport.
Now, on your last paragraph on the next page, kind of -- they have to be read together, surely?
Mr. Farquhar: Yes, yes, they do.
Senator Jessiman: So it is subject to your getting Peel and Mississauga in line?
Mr. Farquhar: As you know, the role of officials is to provide their best technical advice to ministers, consistent with their understanding of the policy and the policy mandate that they have been given.
As you can see from this note -- and this opens a bit of a window on the manner in which officials and ministers interrelate, we provide different views and different options open to the minister and make suggestions and give reasons why and draw certain conclusions. That is what our role is in providing these confidential pieces of advice to the minister. The minister, of course, in every situation, will make his own decisions on the course of action to follow. In this case, the minister chose to take a particular course of action.
In addition, it is not infrequent that officials would not necessarily be privy to all of the discussions that may be taking place at the ministerial or political level. And it may well have been that the minister had had -- or some of his political advisors or other colleagues, had discussions with the mayor of Mississauga, or there were suggestions that perhaps a meeting would be the most productive way to address these issues. We may not, indeed, have been aware of that, but that could have been one of the reasons why the minister chose to proceed with a meeting, rather than sending the letter as it was written. And it may have been, after that meeting, the minister would have decided to send this particular letter or that particular letter, depending upon his personal view, not officials' view but his view, of the position of Mississauga and how he saw that in terms of what he believed he wished to do in terms of the recognition.
Senator Jessiman: I think you've answered my question but I just wanted to be certain that I can read that last paragraph with the knowledge that you and the other officials understood that the minister needed something more?
Mr. Farquhar: That is correct. And that is why we alluded to the fact that something more is coming. Then, if it doesn't come, it is your decision to make as you so choose.
Senator Jessiman: Thank you.
The Chairman: You drafted, as is common practice, an anticipatory letter, a letter anticipating that a condition would be met before the minister would sign it.
Mr. Farquhar: Yes.
The Chairman: And that condition was never met?
Mr. Farquhar: That's correct.
The Chairman: And the unsigned letter was never sent. It was just a draft letter by yourself.
Mr. Farquhar: And the only letter that is official in matters is correspondence which is signed by the minister. He is the one that makes the policies and makes the determinations, not the officials.
The Chairman: Thank you very much for that information, Mr. Farquhar. We appreciate it very much.
Is Mr. Robert L'Abbé with us?
Colleagues, the witness will be introduced by Mr. Nelligan.
Mr. Nelligan: Senators, we have with us this afternoon, Mr. Robert L'Abbé of the auditing firm of Raymond, Chabot, Martin, Paré, who was an author of the audit report which was referred to by Mr. Lane in his evidence yesterday and he will describe to us the audit process that he carried out.
The Chairman: Mr. L'Abbé, you are aware of the fact that we have been swearing our witnesses?
Mr. Robert L'Abbé, Raymond, Chabot, Martin, Paré: Yes, I do.
(Robert L'Abbé, sworn)
The Chairman: Mr. L'Abbé, do you have an opening statement or a few remarks you would care to make?
Mr. L'Abbé: The only statement that I would have at this time is that my opinion is this: That the committee has taken or has reviewed of our report and is aware of the content of our report. We have two reports, one on the monitoring activities and the other one on the auditing activities. Am I correct in making this assumption?
The Chairman: It has been distributed, yes.
Mr. L'Abbé: Our responsibility was twofold. The first one was monitoring activities. At that time, it was to review all the procedures that had been used by the process consultant to keep control of all documentation from the moment that the documentation has been received by, I do believe, a contracting group in the airport of Toronto.
And then, at that time, throughout the evaluation process, we have made sure that everything was under the control and was under secret.
Then our second assignment was the auditing activities. So our auditing activities was, in the first place, to review the process evaluation methodology which has been set up before we start our work, and we did not participate in establishing this methodology.
Then after that, our responsibility was to look at all the evaluators, reviewed the plans and the sub-plans and that they have answered questions and that the question made sense. So in our staff, we had qualified personnel wherever it was necessary to have a look in the work that has been done by the evaluator.
We did not participate in making any evaluation whatsoever; however, for our own -- to make our own opinion, wherever we found, if there was error that had been made, we had qualified and quantified those errors. We looked at the scoring and we tried to determine the impact that this error was on the overall evaluation.
You can find this in one of the appendices in our report on the auditing report. And finally, as a general overall, we found that, whatever discrepancies that we had found did not have any effect on the evaluation made by the PEC which was the Proposal Evaluation Committee.
The Chairman: I see. You say you might have detected an error?
Mr. L'Abbé: Yeah.
The Chairman: But it had no material effect on the outcome or the final decision of the evaluation committee?
Mr. L'Abbé: No, Mr. Senator.
The Chairman: You say, at the conclusion of your report, that the proposal by Paxport gives a rate of return to the government as projected, even without money put in by the airlines.
Mr. L'Abbé: This was to make up our own opinion, Mr. Chairman. One proposal did not refer to any charges that would have been made by the airlines whereas the other one did.
So what we have done is that, in order to make a good evaluation of the two proposals, at that time, we have taken that into account, and we have just done the same as if there was no income coming from the airlines at that point, and found out that there was enough money to support the commitment that they have put up in their proposals.
The Chairman: And on the last page of your report, you examined the viability of the project, and you found Paxport's offer to be more interesting to the government or advantageous to the government?
Mr. L'Abbé: Well, on the -- yes, because on the figure -- figure-wise, it did, and weight-wise, because it was a scoring, and the weight of the scoring was confirmed, and we were in agreement with what would be the best overall proposition as outlined by the PEC which is the Proposal Evaluation Committee. So we did agree with their report.
Senator Hervieux-Payette: Since we were given two Raymond, Chabot reports, the first one being on the monitoring of Terminal 1 and 2 redevelopment project. This is the title. And there is another. Just to make sure that we don't confuse -- "Validation of Terminal 1 and 2 Redevelopment Project Evaluation Process".
I have the same date, and there are similarities in the two because, of course, you were given two mandates, one with the monitoring of the evaluation process or proposal; the other one saying the evaluation of the evaluation process.
I am a bit confused about why we should have two teams from the same firm to evaluate and monitor? Was it done at the same time? Was it done one after the other? Was it done during the course of the evaluation process, done by the team that was put together by Mr. Lane?
Mr. L'Abbé: To clarify your question, I must say that there were two reports dealing with two issues and they both were both made by the same team. The first issue was monitoring issues; that was for the control of all of the methodology and the control of all documentation which has been handed out to the evaluation committee. The other one is strictly auditing; under this auditing report, we're reporting the work that we have done regarding the evaluation itself by the evaluator to see that all the documents have been reviewed by the evaluators; that all the plan and subplans, at that time, where you had some scoring to do in the subplan business, and then this was turned over to the plan, because there were five plans at that time.
So this is two complete reports. One is the monitoring of the documentation; the other one is the auditing itself for the whole evaluation made by the two proposals that we've had. But both of them were made by the same team.
Senator Gigantès: Which evaluated itself?
Mr. L'Abbé: Pardon me?
Senator Gigantès: Which, in a sense, evaluated its own work?
Senator Hervieux-Payette: No.
Mr. L'Abbé: No. We did not make any evaluation whatsoever. We did work that -- the only thing that we did is to see that every question was answered and that the methodology that was first prepared before the committee took over to make the evaluation has been followed and, in cases where it was not being followed, to see that it was properly evaluated. We did not make any evaluation. We did not participate in any sort of evaluation. We did not participate in establishing the methodology. It was strictly auditing work.
However, we had to give an opinion. And where we found some discrepancies, we tried to weight that, these differences. And these differences, at that time, were weighted towards the best overall proposition. And we did not make any change in the PEC report. We just give our opinion that, in our opinion, the PEC report was representing the result of the evaluators. I believe there were 54 evaluators in there.
Senator Hervieux-Payette: So I will deal with the two reports separately since they were two different reports, and it is hard for us to clarify the two at the same time. So I will address the first one of the monitoring, first, and to see how the process went on and do my own evaluation.
One of the questions I would like to ask you is, in the mandate, in page 2 of the mandate, you have, in the four points -- terms of reference of your mandate, it is written: Monitor the roles and contribution of each member of the other team, the evaluation team, particularly with respect to ensuring full and meaningful participation by private sector members.
And I was a bit curious, why there would be a less full and less meaningful participation of the public sector members? Why would the private sector members be singled out in the mandate? Is there a reason? It is there. I don't understand why it is there.
It is page 2 of the first report.
Mr. L'Abbé: May I say this, that this reference has been handed out to us by the Transport department. And in the team, there were some members from the private sectors.
Senator Hervieux-Payette: And so when you were given the mandate, there was no discussion with the department as to the terms of reference? You were not asked to define the terms of reference, so that -- I mean, you would, with your previous experience probably, that you would contribute in developing these terms of reference. They were given to you. There was no discussion, and you proceeded accordingly.
Mr. L'Abbé: Yes, because there are not many experience such as evaluation of proposal of a big airport like Toronto airport.
Senator Hervieux-Payette: How were you selected? Was RCMP responding to a request for proposal to do the evaluation process? Did you submit the team, the members of the team and the fee and everything before you were awarded this mandate?
Mr. L'Abbé: In the first place, we have been called by Mr. Victor Barbeau that they were in a, kind of, state of emergency.
And then, at that time, they were just about to receive the proposals and they want to have a process evaluator -- process auditing that they wanted to do.
So this, we did receive this phone call. And at that time, verbally, he told us what would be the terms of reference. And then, a little bit later, we did receive a first draft of a terms of reference, by the end of June, if I recall correctly.
And on the eve, which was July 13, we did receive a phone call and a fax giving us the terms of reference. And we had been asked to be there by July 14, because the evaluation process would start there. And then part of our responsibility was to monitor the documentation that they had received, which is part of this report, like the monitoring activities.
Senator Hervieux-Payette: How would you conduct your mandate, since you were more or less supervising that the other team was doing its job? You were more or less over-looking their shoulder to see that everything they were supposed to achieve was being done.
How would you do that? Were your people part of the subcommittee? Were you -- what kind of documentation was handed to you? Did you get their report, their preliminary report? What was the interface between your team compared to the team that was in charge of the evaluation?
Mr. L'Abbé: We were totally independent. And our responsibility was something similar as being an auditor of financial statements of a big firm. So they first had to do their work, and once their work were done, it is submitted to us for review and auditing and making a report on that.
Senator Hervieux-Payette: So that is how you conducted the monitoring, the first mandate giving you the monitoring of the evaluation process.
Mr. L'Abbé: The monitoring is that we have to review the methodology that they use, the kind of control that they have and the control that they use over documentation and that the control is applied throughout the evaluation period. And that is what we have done and this is in our report. And if you have a chance to go through the report, I think it is said very, very clearly exactly what we have done in these monitoring activities.
Senator Hervieux-Payette: In this one, and in page 11 where we look at the monitoring activities, you have on one of the points: We reviewed the evaluation documentation and verified their compliance with the objectives and requirements of the RFP.
I would like you maybe to explain to us what was -- exactly what you were doing in meeting this activity, in accomplishing this activity. Were you, in fact, making sure that the proposal was complying with the request for proposal?
Mr. L'Abbé: In the first place, we did, but, also, because all those that have submitted a proposal, they had a methodology to follow to make this proposal. And based on that, there was a committee that was set up to set up the proposal evaluation methodology, and those were the documents that were handed out to us. However, I must say that we did not participate in any way or form in establishing the method or evaluating the method.
This has been given to us as a documentation for doing our work, and this documentation has been handed out to, also, the evaluators.
Senator Hervieux-Payette: So from what I understand is that the methodology, the evaluation criteria, scoring, weighing factor and what they call evaluation booklets were developed and approved by the PEC. Who developed that? You didn't develop these documents?
Mr. L'Abbé: No. That was the committee that was made between the time of the call for proposal and the time that the proposals were deposited to the contracting group in Ottawa -- I mean, in Toronto.
Senator Hervieux-Payette: Do you know who had prepared these booklets so that you could do your job?
Mr. L'Abbé: Well, I wouldn't know off-hand, but if I --
Senator Hervieux-Payette: Was it the department or another private consultant?
Mr. L'Abbé: I wouldn't be able to answer that because I don't know. I wasn't participating in there. They were handed out to us. But I think I may have remembered seeing something in the PEC report that they were mentioning something about it.
Senator Hervieux-Payette: When you do what you refer to, your usual standard practice as a chartered accountant, you do the auditing of the financial statement of a company, do you have booklets like that to follow? Where do you find your procedures? Is it part of your own professional training? You don't have your client giving you an instruction to do it?
I am just trying to compare both, because I just find that strange that you would be handed all the methodology, that you would not have part in developing the methodology, and that you would just have to report on a series of evaluation booklets. It seems to me that it is written here that there were 35 booklets and that you just had to make sure that, more or less, the booklets were filled?
Mr. L'Abbé: In the first place, I must tell you that we have some guidelines of making auditing.
Our responsibility and the knowledge that we have, it is not only auditing the books; we are doing all sorts of auditing, but the principles are the same.
So based on the assumptions that we have, we set up a program. And based on that program then, we are following up our audit in order to make an opinion. Because what we are asking to do is to give an opinion on the work that has been done and the control that they have over the documentation.
But in order to give an opinion, then at that time, we must know the methodology that they are using, and we are trying to -- what we are trying to establish, that they have a good control, that the purpose of this evaluation is what they are looking for and that they are applying the principle that has already been established or has been asked by the firm that has deposited the proposal, that they follow.
So this is -- and based on that, we have to make our own work. So this is the reason why, in our report, we are just mentioning, the work that we have done toward trying to achieve the goals set up by the RFPs and the evaluator and the evaluation committee.
And we also mention what we have done in each of the plan. And we had five big plans that I mentioned before. And under these plans, there were 35 booklets which we called the sub-plans.
Senator Hervieux-Payette: But can I conclude that, yes, you complied with the evaluation booklets in terms of making sure that they were followed, but you went above that in order to comply with your mandate?
Mr. L'Abbé: No, we did not go above that. We just made our mandate, because our mandate was to make a review and then we give an opinion. We did not make any change whatsoever in the proposal evaluation committee report, but we were in agreement with their final recommendation.
Senator Hervieux-Payette: And your report on page 5, I mean, following a verbal authorization from the deputy minister -- I suppose it is Mr. Barbeau. It is the fourth paragraph.
Mr. L'Abbé: Okay.
Senator Hervieux-Payette: A verbal authorization from deputy minister, we, Raymond, Chabot, Martin, Paré, arrive at the hotel in Toronto. We met the chairman of the PEC and started our monitoring activities.
It seems that you came really at the last minute, but you said you had received the phone call before you were given the mandate. It is just the way it is worded. We have the impression that there was very little time before you were hired and your services were retained, and then you were put to work in Toronto.
Mr. L'Abbé: As a matter of fact, they were a very short period of time. As I mentioned before, I did receive the first phone call by Mr. Victor Barbeau, and he explained to us what they were expecting from us.
Then, on June 29, we did receive a draft report of what was the assignment about. Then on the eve, on July 13, we did receive a phone call followed by a fax, stating that this is the terms of reference and then, at that time, that the evaluation would start on July 14. And then they would need somebody to get there at the first moment. So that is why we started out very early.
But later on, in July then, at that time we did receive the final terms of reference, and also the proposal committee evaluation team.
But I think the urgency of getting there early was to make sure that all documentation was under control, that they were properly under control, that the procedures were under control. So therefore, at that point on July 14, we did start our monitoring activities, whereas our auditing activities started at a later date. We started only at the moment where some of the booklets became available after the evaluator had done their evaluation on each of them.
Senator Hervieux-Payette: So there was not necessarily everything done starting on July 13 or July 14. The two teams or the two mandates did not start simultaneously.
Mr. L'Abbé: Well, they did because we had to follow it simultaneously. But I must tell you that I believe the evaluators had ended their work and they had finished their report some time late in August, and then the bulk of our work as far as auditing is concerned, or the completion of our work, started then. And then we completed our work on the premises by, I believe, mid-September. And then our report was finally finished by mid-October of the year 1992.
Senator Hervieux-Payette: Did you select your team?
Mr. Nelligan: Excuse me, for the record, I think the are witness meant August 1993. You said September 1992.
Mr. L'Abbé: I believe it is 1992. Yes, that is 1992.
Mr. Nelligan: I am sorry.
Senator Gigantès: It is the only thing one understands from the testimony -- a date. For the rest, it is the words, method, methodology, evaluation, monitoring and --
Senator Hervieux-Payette: It is a complicated thing and I think you understand, Mr. Chairman, we need to understand what was the whole process, what was their exact mandate and what would come out of the mandate.
And on page 8, I have again two names, the staff of the process consultant and the staff of the process auditor. This is the fifth paragraph of page 8.
Process consultant and process auditor, this is both of your firm? Two different people?
Mr. L'Abbé: No, the process consultants were Price Waterhouse and the process auditor were our firm.
Senator Hervieux-Payette: Okay.
The Chairman: Senator, I think it might help you in your answer -- in answer to your first question, how it began, I think it is in yesterday's testimony by Mr. Lane. He sets it out in the second page.
Senator Hervieux-Payette: Maybe it is easy for you to -- all the titles that are being used, when we don't use a name -- when I refer to Mr. Barbeau, I know it is the deputy minister, but if you would just use the words. I need to know the name to know who was doing what.
The Chairman: I was referring to the establishment of the methodology and the criteria, how it began and how it ended up with Mr. L'Abbé.
Senator Hervieux-Payette: You understand, if there is a process consultant and a process auditor, I said, are they doing the same thing? I suppose they are not. But one is saying this is how it should go, and the other one is saying, yes, that is what they are doing. That is the way I try to reconcile.
On page 11, my question would be -- since we see all the activities that you were asked to conduct at the beginning with a checkmark, my question would be, did the review of the evaluation documentation give you the assurance that all the terms and conditions outlined in the request for proposal were totally respected?
I mean, when you did all these activities, can you say to us that every point -- I mean, did you have also within your mandate -- did you just stick to the mandate that the process consultant, you know, outlined, or did you have anything to do with the request for proposal -- if the proposals were really respecting all the terms and conditions of the RFP?
Mr. L'Abbé: Well, if you are referring in the monitoring activity report, I must say that we had to look that all documentation was in respect of the request for proposal that was made, and that all the methodology that has been established was referring to the request for proposal, and that all those who have filed a proposal, that they followed this request.
Senator Hervieux-Payette: So if I translate that into my terms, is that you didn't touch the subject matter of the proposal, per se, the two proposals of Paxport, and so on. You just touch upon the documentation, if everything that was requested was there, but you didn't go into the substance of it and the monitoring?
Mr. L'Abbé: We don't have to go into the substance. We just say that these things are there and they have been applied and we give an opinion on that. But in order to do so, we have to mention what type of work we have done in order to arrive to our opinion.
Senator Hervieux-Payette: And there is another, page 12, on top. I suppose that when you mentioned: We observed that private sector members of the committee meetings and that the working sessions contribute meaningfully to the evaluation and the decision made by the committee -- this is to go in line with the mandate that was given to you.
Mr. L'Abbé: That is correct.
Senator Hervieux-Payette: I still don't understand why it was there, but we have to ask those who gave you the mandate.
Page 19, when you say, in the business plan, and it is just a question to clarify what is in your report: The evaluation committee for this plan had no private sector member other than Richardson Greenshield which acted as consultant.
Why don't you consider them as private sector people -- member?
Mr. L'Abbé: We do. We say that, too. We say these were the only one from the private sector. That is what we mention.
Senator Hervieux-Payette: You mean it is because they were not part of the formal evaluation committee, they were just assisting the evaluation committee?
Mr. L'Abbé: They were asked to prepare a plan for the evaluation, and these were the only ones from the private sector that were presented on this business plan.
Senator Hervieux-Payette: Okay. The rest of the report, I think, speaks for itself. And with now what you have answered, I will go to the second report which is, and I will repeat for my colleagues, "The Evaluation of Terminals 1 and 2 Redevelopment Project Evaluation Process." Now, we are dealing with your second mandate. And you say that the teams were the same. The same people were -- did you select the members of your team?
Mr. L'Abbé: Yes, we did select the members of the team depending on the qualifications, which you are going to find in our report on a summary basis. You are going to find all the members that did work on that.
Senator Hervieux-Payette: Just a commentary, probably July 14 was not the best time of year to find your staff.
Mr. L'Abbé: When you are in business, when the business is there you've got to work.
Senator Kirby: That is why we are here, just in case there is any doubt.
Senator Hervieux-Payette: In the auditor's report, the second page in that report, to Mrs. Labelle, in your last paragraph: In our opinion, and considering the finding described in section 5 of our report, in all material aspects, the evaluation documentation was in conformity with the requirements of the request for proposal.
Mr. L'Abbé: May I ask you which page are you referring to?
Senator Hervieux-Payette: It is the September 18 letter signed by you.
Mr. L'Abbé: This is the auditor's report you are talking about.
Senator Hervieux-Payette: Yes, it is the document 001400, second page of the second report. At least for me, in my book, it is the second page. There is a covering letter and then there is the beginning of the auditor's report.
Mr. L'Abbé: Yes, the auditor's report itself.
Senator Hervieux-Payette: It is just to clarify. This team -- the evaluation documentation was in conformity with the requirements of the request for proposal. Could you explain this process?
Mr. L'Abbé: That is part of the methodology that has been handed out to us as a basic documentation to do our work.
Senator Hervieux-Payette: Are we still dealing with the booklets there?
Mr. L'Abbé: Still dealing with the booklets. But the first one is the control of the documentation, whereas this report is the control of the work that has been done on those documentation.
Senator Hervieux-Payette: Then I go to, since I read it all, to page 17; I had a question -- the title of the validation that the final recommendation conforms to the pre-defined evaluation process.
Again, this has nothing to do, that recommendation for one firm or another means that you are approving the recommendation. You just say that they have followed the process to come to that conclusion?
Mr. L'Abbé: That is correct.
Senator Hervieux-Payette: This is how I interpret that. Okay. A question that comes to my mind then, is it the standard practice in auditing a proposal -- proposal with an "S", the two proposals -- that the firm who is auditing does not check the compliance with the request for proposal? Since you should probably make sure that everything that was asked in the request for proposal should have been there, not just that the process was respected, but that everything was covered in the request for proposal.
You never touched that at all, incidentally or saying, "We will give more than the client wants because we feel it is necessary for us to make a recommendation"?
Mr. L'Abbé: No. Because our responsibility was not -- it was only to make evaluation on the documentation that has been deposited on July 13 over the contracting group.
Senator Hervieux-Payette: And you never went back to those who gave you the booklet or the process, and said, "Well, we think that we should add something else." When you were awarded or afterwards, did you say, "We should probably go a little deeper"? Or you just respected the whole thing without any, I would say, pas pris au mot, to intervention --
Senator LeBreton: Just as a supplementary, would it not be the process consultants who would do that, Price Waterhouse, that would check it against the RFPs?
Mr. L'Abbé: I don't know what is the terms of reference of the process consultants, but as far as we are concerned, the only thing we had to do was only to make an evaluation, not to make any process, and to make sure also that no additional documentation would be handed out to the evaluation committee so that would make better or -- the proposal.
However, whenever there were some questions asked, we made sure that all those questions were strictly to make some clarification of what was already in the proposal.
Senator Hervieux-Payette: Why I am asking that is because, this morning, when we met with the people who prepared the report for the Minister of Finance of the time, they had serious doubts as to the validity of the financial viability of the proposal. And of course, this is your trade, to see if a deal is well structured, if the people who are making a proposal, and if -- is there not a moral responsibility to alert your client, the Government of Canada, that there might be some problems because you have seen and reviewed every document?
You saw the substance. You even have a section at the end of this report saying that you tried to, I would say, level the rules to make sure that you could compare the two, and you use your financial model to try to compare apples and apples, and oranges and oranges. And you make some comments about it.
But if you had discovered that there was a serious flaw in the recommended proposal called the best overall acceptable proposal, would you have signalled that to the minister who had given you the mandate?
Mr. L'Abbé: Well, our responsibility was to make evaluation of the plan and the sub-plan regarding the finance business plan. At that time, on those plans, you had a scoring that was made on the subplans. And this was turned over to the plan itself. And then from that point on, it was weighted in order to come to the best overall proposition.
At that time, we just followed what has been done, but we didn't make any recommendation whatsoever. We just stated that the facts that are reported in the PEC report are the facts that have been taken from the request for proposal filed by the two -- in the two proposals -- proponents.
Senator Hervieux-Payette: I am asking that question because on page 33, last, that was quoted by my colleague before, when we are looking at who was going to pay what, I mean, in the last three paragraphs, you mention: In the analysis, we found that the structure of the financial offer from Paxport was substantially more interesting to the Crown than was that of the ATG, in fact, the fixed amount -- blah, blah, blah. And then after that, you say the formula used by Paxport to establish a return to the Crown includes a charge where the ETDG did not. In other words, the charge to be collected from airlines includes a payment to the Crown.
Is this a process or is it an analysis of the -- I would say that is the only three paragraphs analyzing the financial viability or the financial structure of the transaction, and I feel that it was a little bit over and beyond, I mean, what I had seen in the rest of the document.
Mr. L'Abbé: In the first place, I must mention that this part was done by Richardson Greenshield, that they have used their own methodology which was not the methodology that was submitted to us to review.
So what we have done is that, we, for our own purposes, in order to make an opinion. So what we have done is we have taken the information that was in the proposal and we have set it up in the form, the form that is mentioned in this appendix. Based on that, we came to these conclusions. That is why previously there has been a question that has been asked to me regarding the charges to the airlines.
So what we did, in this, for our own purposes, in order to compare both proposals on the same level, we have taken out this charge that is mentioned in the Paxport proposal. We have taken that out and compared that with that of the ETDG. And based on the two -- we found the best return based on their information was the return that was made by Paxport which, from the figures that they had, they were able to give to the Crown -- they give to the Crown what they had mentioned.
And we also mentioned in the report that in Year 20, I think there was an error regarding the dividend, so we have taken that into account, too.
Senator Hervieux-Payette: But you did not analyze the whole financial structure, who was going to -- how people would finance equity, who was going to -- the whole financial structure. You did not --
Mr. L'Abbé: No, because this was not our mandate.
Senator Hervieux-Payette: Thank you.
The Chairman: Is it supplementary?
Senator Jessiman: Yes, it really is.
The Chairman: All right, go ahead.
Senator Jessiman: Mr. Chairman, I would just like to read in the last paragraphs. She read the second two last. The Chairman actually made reference to it.
Senator Hervieux-Payette: It was read before, Senator Jessiman.
Senator Jessiman: Not in this --
Senator Hervieux-Payette: Well, you did. You can repeat it.
Senator Jessiman: To ensure its viability, our examination of Paxport's proposal revealed that, to pay the proposed rent to the Crown, sufficient cash flow could be generated from operations without charging these costs back to the airlines. It is understood that this exercise has been conducted solely to reach an independent opinion and at no time have we as process auditors attempted to substitute ourselves for the evaluation committee.
I only have one other question. For the first time, in all this documentation, I find that you make reference to a company -- and I know it didn't qualify -- Morrison Hursfield. When we were given the players in this, we were given three, and one we were told had withdrawn, and that that was Canadian Airports.
I guess at the time you weren't told that there had been a Canadian Airports at some point?
Mr. L'Abbé: In these documentation, there are three proposals that have been deposited that we know of. And the one we are talking about is MHT.
Senator Jessiman: MHT?
Mr. L'Abbé: That is correct.
Senator Jessiman: And they didn't put up the $1 million.
Mr. L'Abbé: They didn't meet the requirement by not providing a letter of credit nor a security deposit, nor was it registered before filing the proposal. And this has been reviewed by the justice department and it was approved.
Senator Jessiman: Thank you very much.
The Chairman: Senator Tkachuk and then Senator Kirby.
Senator Tkachuk: Your firm out of Montreal, I don't know very much about it. You have some -- you have done some other government work?
Mr. L'Abbé: Yes.
Senator Tkachuk: For what other departments?
Mr. L'Abbé: Well, almost all the departments.
Senator Tkachuk: Almost all of them.
Mr. L'Abbé: Yeah, because our firm, we are located throughout Canada, and we are known through, like, Doan Raymond, in front of the world as Grand Thornton International. But in the province of Quebec, we are over 200 partners and we have a staff of over 1,500.
Senator Tkachuk: So in a business, if I had you as my bookkeeper, so to speak -- had your company as the people who did our books, fortunate enough, would you also do my audit?
Mr. L'Abbé: It all depends. In the first place is that, if we are your accountant, I wouldn't do your audit because I would be in a conflict of interest.
Senator Tkachuk: Exactly. So when you were engaged to handle the audit process for the evaluation, if you were part of the process, could you do an audit?
Mr. L'Abbé: No.
Senator Tkachuk: If you were preparing for the process, could you do an audit?
Mr. L'Abbé: No.
Senator Tkachuk: So what you do is ensure that what the evaluation team has set forward as their organizational plan for the evaluation -- for example, if they say, we need a $1-million deposit, as an auditor, you'd make sure there is a $1-million deposit.
Mr. L'Abbé: That's correct.
Senator Tkachuk: So what you would be looking for would be some irregularities in what the professional people that were organizing the process, and Richardson Greenshields and Price Waterhouse, that what they did and what they said they were going to do was conformed to?
Mr. L'Abbé: As far as Price Waterhouse is concerned, we did not make any audit of what work that has been done by Price Waterhouse. As far as Richardson Greenshield is concerned is that they have not followed the plan; they used their own plan. But we didn't make any change of that.
But for our own purposes, we used a plan that was similar. And we have put our figures just to make that our opinion. And based on our opinion, it was not made any difference whether they have used Richardson Greenshield or whether they have used the plan; they came out to the same recommendation.
But that is why we made sure that, at least, if they had not followed the plan, at least, they came out to the same recommendation that they would do if they would have followed the plan. So that is why this is not -- we did not make any correction of the PEC report. This was only for our opinion, to make sure that they came out to this opinion, so we did agree, too, that the opinion is correct. But we did not go within the work that they had done.
Senator Tkachuk: If you were doing an audit, and I am sure you do many, oftentimes you are asked for a management letter.
Mr. L'Abbé: If it is in the terms of reference, yes.
Senator Tkachuk: I am not saying that this was part of your terms of reference. But my point is, if you have a management letter for corporation books at the end of the year, the management letter will point out things that they can do better, will it not? Things you find --
Mr. L'Abbé: To improve, that they would improve, that they were in control.
Senator Tkachuk: Things they can do better. You have particular standards that chartered accountants have to uphold. If they see irregularities that would be considered -- well, irregularities that they would have to report to other authorities, tax things, for example, would you not, if you were doing a company's books?
Mr. L'Abbé: You need more clarification on your question, sir.
Senator Tkachuk: Let me put it this way. If you saw evidence of -- and let us just say we are doing business books for a company. If you saw evidence of fraud, or problems like that, you may say, "I think you have a problem here", to whoever you are reporting to.
Mr. L'Abbé: We would point it out to the management, yes.
Senator Tkachuk: You would point it out that someone may have sticky fingers or something. If things were irregular here when you were doing your audit, who would you report to?
Mr. L'Abbé: Well, we report to the minister. Because we must bear in mind that our responsibilities was to make an audit to try to determine what would be the best overall proposition. And this work has been done by the proposal evaluation committee. And our responsibility was to make sure that they have done all work in order to arrive at that.
So what we have done is we have outlined the work that we have done. And as you mentioned before, we have found a few items that were not quite the same thing as the methodology called.
But the evaluation committee, they have taken a position on that. But for our own opinion, we have reported that this would be, what we have in the appendix at the end of our report, I would say that this would be, kind of, our management report to this.
Senator Tkachuk: You had to satisfy yourself.
Mr. L'Abbé: We had to satisfy ourselves and come to an opinion to see if the recommendation made out by the proposal evaluation committee was the right recommendation based on the work and the methodology, and also the proposal that has been filed by the proponents.
Senator Tkachuk: You were engaged and reported to the minister. What were your instructions?
Mr. L'Abbé: Well, I had the terms of reference and I had a contract.
Senator Tkachuk: And your terms of reference were to do an audit?
Mr. L'Abbé: We had the terms of reference in there and that is what we done. We done the audit. And that's what we say. We give an auditor's opinion, but based on the auditor's opinion, we are giving all facts why we come to this opinion.
Senator Tkachuk: You have certain professional ethics as a national firm, a chartered accounting firm?
Mr. L'Abbé: Yes, we do.
Senator Tkachuk: You do. To do anything irregular would cause you a problem?
Mr. L'Abbé: In the first place, we don't do anything irregular.
Senator Tkachuk: I understand that. I am saying, if you were an accounting firm and you did something irregular, it would cause you a problem?
Mr. L'Abbé: I need more specifics to your question.
Senator Tkachuk: I don't want to get too specific because there are so many of them. But I mean, what I am trying to get at is you have a professional responsibility as a chartered accounting firm, a consulting firm, to properly do an audit once you are engaged to do an audit. This is not something you take lightly?
Mr. L'Abbé: That is correct.
Senator Tkachuk: This is something that is very important not only to the persons who are doing it, but to all the partners across the country.
Mr. L'Abbé: More than that, to all the public that reads our report.
Senator Tkachuk: To all the public. And you have a responsibility to your profession.
Mr. L'Abbé: Hm-hmm.
Senator Tkachuk: So when you produce a report for the government to the minister, this is something that is of a very strong priority?
Mr. L'Abbé: Hm-hmm.
Senator Tkachuk: And if there were things that were done untoward within the process, you would be obligated to point it out?
Mr. L'Abbé: Of course. And the reason for that, that we have an appendix to report, is because we pointed out a few items, and we pointed out, and we said how we dealt with that and how -- what the effect that would have on the final proposition or the final recommendation.
Senator Tkachuk: I wasn't meaning -- and before I finish, I just wanted you to understand, I wasn't meaning to say that you did. I know the capabilities of your firm. I was just trying to get on the record the fact that, when you produce a report and you say things, that this is not something that is taken lightly and that it is very seriously done.
Mr. L'Abbé: We always do that.
Senator Tkachuk: There was nothing personal here or anything like that. I just wanted to get it on the record to make it clear.
Mr. L'Abbé: I must tell that it is so important, before making a final report, all the members of the committee were sitting in. We did review the report to find out everything, that our findings were there, that our opinion is there and what we had to report is there, and if we had some discrepancies, what kind of effect it would have on the final findings. And that is what we did. So it is not only a matter of one writing a report; it is a matter of a group, which I was heading at that time.
Senator Kirby: Thank you, Mr. Chairman. I only have a couple of questions. Mr. L'Abbé, I understand what you did. I just want to make sure I also understand what you didn't do.
Let me just ask you a couple of specific questions which I understand to be outside your terms of reference, and I want to make sure that I am correct.
Number one, you were not asked to determine if the evaluation process was the best or most appropriate member for evaluating the proposals. You were given the evaluation process and asked whether it was, in fact, executed properly, as opposed to being asked to, in any way, to assess the appropriateness of the evaluation process. Is that right?
Mr. L'Abbé: In our monitoring activities, we have to look and make sure that all this evaluation process which was handed out to us was exactly what it was in the request for proposal.
Senator Kirby: But in so doing, you did not attempt to express an opinion on whether the evaluation process was the right one or the one that should have been used?
Specifically, as a sort of illustrious example of that, you did not attempt to express an opinion on whether or not the weightings that were given to the various elements of the scorecard, the specific aspects of the various proposals, you did not attempt to offer an opinion as to whether or not those weightings were appropriate. Is that right?
Mr. L'Abbé: No, Mr. Senator.
Senator Kirby: Am I also right that you did not attempt to look at the scoring that is given in that ultimate table and understand whether the way the scoring was developed was appropriate. You simply observed that the numbers were right.
Mr. L'Abbé: That is correct.
Senator Kirby: You also did not attempt to understand if the proposals were in full compliance with the RFP. Again, you took the proposals and left that kind of judgment question up to the evaluation team. You were not doing any of that. Is that right?
Mr. L'Abbé: We looked at the proposals as they were deposited, at the time that they should have been deposited. And we made sure that nothing has been added to those proposals. And the only thing that it could have asked was an explanation of what was already in there.
Senator Kirby: Right. And similarly, you did not attempt to assess the reasonableness or the appropriateness of the overall evaluation process, among what might well have been other alternative ways of evaluating the proposal. You took the process as given and tried to understand whether or not people had followed the process as it had been specified. Is that right?
Mr. L'Abbé: We took the process, but we had staff, qualified staff for each of the plans. And we looked at it, at least it makes sense, but we did not try to make any evidence or saying that the score is too low, too high, but just to make sure that it made sense.
Senator Kirby: And all those questions I have asked are really background to your statement that Senator Jessiman read a few minutes ago, in which you said, at the end of the quotation on page 33 of your report, you said, we as process auditors attempted -- sorry -- at no time have we as process auditors attempted to substitute ourselves for the evaluation committee.
So, essentially what you were doing, if I can use a golfing analogy, you were attempting to see whether the golfer played by the rules. You weren't attempting to see whether or not he played the game well or badly.
Mr. L'Abbé: The only thing that our responsibility, not to play the game but to make the proper evaluation --
Senator Kirby: On the process. So all you were doing really was understanding whether or not they had gone through the hoops in the correct way, as opposed to making any judgment about either whether there was a better way to evaluate it or whether the weightings were right or the judgment was right -- all of that, you were told, was to be absolutely given to you and you were not asked to question any of that. Is that correct?
Mr. L'Abbé: No, but if, in our -- during the time that we were making our audit, if we found that something really did not make sense at all, then, at that time, we would have discussed that with the --
Senator Kirby: But if you had an idea that here was another evaluation procedure that maybe should have been used, that was outside your terms of reference.
Mr. L'Abbé: That is outside our terms of reference.
Senator Kirby: A couple of last questions. I presume, since the call for the RFP had put been out some time in advance, and I presume you were hired well in advance of the responses coming in, so you had --
Mr. L'Abbé: Not well in advance. Not later than probably 15 or 20 days before the evaluation started. So that means late in June of 1992. And we had to be there on July 14, 1992.
Senator Kirby: And so you were appointed, kind of, at the last minute?
Mr. L'Abbé: Yes.
Senator Kirby: It is sort of strange, given all the other time frame that went into this. Just as a matter of curiosity, did you ever ask anybody why you only heard about this at the last minute?
Mr. L'Abbé: I must tell you that we have had a little bit of experience in airports because I was sitting on the advisory committee to the Minister of Transport regarding the transfer of the airports to the local authorities. Secondly, we had -- some of our staff had --
Senator Kirby: You finish that in a second. People keep using the minister around here. I never know what minister they are talking about. What minister was that?
Mr. L'Abbé: The Minister of Transport.
Senator Kirby: I know that. Which Minister of Transport? Who was the body? Who appointed you to that committee?
Mr. L'Abbé: It started off with Mr. Bouchard, and then, after that -- as far as the advisory committee is concerned. I think I was appointed by Mr. Bouchard, and then Minister Lewis came into office, and after that was Minister Corbeil.
And also, our firm has done some work on base case of many airports before transferring the airports, and this was done on behalf of the Minister of Transport.
Senator Kirby: So you were appointed by the minister to do the --
Mr. L'Abbé: I would receive a phone call from the assistant deputy minister at that time stating they had a request for a process auditor for Toronto, and that was late in June.
Senator Gigantès: June of which year?
Mr. L'Abbé: Of 1992.
Senator Kirby: In the other work you have done on other airports and LAAs, et cetera, there, in fact, you have really been doing an audit that really attempted to establish values. You weren't doing process audits on those other things?
Mr. L'Abbé: No, that was different because, at that time, we were working on the base case, and we were working to find out what would be the valuation of the airport, what would be the proposal that was given by the LAAs and if they were acceptable to the government and so on. We have been involved in that type of work, which is quite different. It is totally different from what we have been asked to do over here.
Senator Kirby: Much more substantive in the sense --
Mr. L'Abbé: The only thing we knew, we knew what was an airport.
Senator Kirby: Some of us use them a lot. We think we know them, too.
That is all for me, Mr. Chairman.
The Chairman: We welcome Senator Gigantès, who is substituting for another distinguished senator this afternoon. Would you like to ask a question, Senator Gigantès, or several questions.
Senator Gigantès: Thank you, Mr. Chairman.
The Chairman: We have no time limits in this committee.
Senator Gigantès: You may have noticed that, though I hold the record for the longest speech ever in Canada, I also consistently make the shortest in the Senate.
[Translation]
Senator Gigantès: How long have you known Mr. Corbeil?
Mr. L'Abbé: How long have I known Mr. Corbeil? Since I was in primary school.
Senator Gigantès: Since primary school. These childhood friendships are so touching. How many contracts have you received in the course of your career from Mr. Corbeil in his various capacities?
Mr. L'Abbé: I think I should make something clear. The reason I received the terms of reference I mentioned earlier is that at the time I had the privilege of being on the committee advising the Minister of Transport about airport transfers.
Senator Gigantès: And the minister was Mr. Corbeil?
Mr. L'Abbé: No, it was Mr. Bouchard at that time. He was followed by Doug Lewis and after that came Mr. Corbeil. Throughout the whole subsequent process of airport transfers and the creation of local authorities, our firm also worked on establishing guiding principles for the local authorities and also evaluating the various airports' assets.
We worked all over the province of Quebec and we had a few jobs in Ontario as well. The first call I got, it was not Mr. Corbeil who gave me the contract, he signed the final contract, but the first was signed by Victor Barbeau. He was assistant deputy minister and he sat on the airports committee too.
So if I had to make an educated guess, I would say that my name was suggested by civil servants like Mr. Barbeau and Mr. Farquhar, whom I also knew in that context. They needed experienced people and they needed them fast, and I imagine they concluded we were the best qualified firm to do this kind of work, especially as we had no connection with the Toronto airport because we had not had anything at all to do, directly or indirectly, with the Toronto airport or with the people who made the privatization proposals.
Senator Gigantès: In June 1992, Mr. Corbeil was indeed the Minister?
Mr. L'Abbé: I think so. I think so.
Senator Gigantès: When Mr. Corbeil was Mayor of Anjou, did you receive contracts from him?
Mr. L'Abbé: Our firm received contracts from him, yes.
Senator Gigantès: Would you be kind enough to tell us what your fees are for this evaluation, monitoring, methodology or whatever it's called that you just explained to us?
Mr. L'Abbé: We didn't do the evaluations, we didn't prepare the entire methodology. We didn't participate in any of that. With reference to monitoring activities, I think our fees were $97,000 with -- for monitoring activities they were $97,170 including GST, for the auditing process they were $198,453.
Senator Gigantès: Do you think that Victor Barbeau acted on his own initiative in asking you?
Mr. L'Abbé: No, I don't. I think he may have made a recommendation, but he may not have taken the initiative. He was the one who called us to talk about Transport Canada's needs with respect to the Toronto airport.
Senator Gigantès: Do you know whether Mr. Corbeil approved the choice of your firm?
Mr. L'Abbé: I venture to think he did.
Senator Gigantès: Thank you.
[English]
The Chairman: All right, Senator Gigantès.
Colleagues, may I ask Mr. Nelligan to --
Mr. Nelligan: Mr. L'Abbé, there was a question which I'm a little confused about as to the extent of your audit. There has been talk of some 37 pamphlets and so on. Were those pamphlets designed to guide you, or were they the pamphlets which were being used by the appraisal committee which would then audit?
Mr. L'Abbé: Those pamphlets was part of the methodology that they used, which were supplied to the evaluators.
Mr. Nelligan: And your job was to so see that they stuck to the outlines in those pamphlets?
Mr. L'Abbé: And those pamphlets covered all the information that was on the request for proposal.
Mr. Nelligan: Did those pamphlets cover off all of the points that the evaluators would have to check in order to see which was the best proposal?
Mr. L'Abbé: Yes, they did. At that time, all plans -- they had a scoring on that. Within each plan, you had different scores that was given, maximum scores that was given for each of the subdivisions.
Mr. Nelligan: Did those pamphlets provide for the fact that the evaluators would have to satisfy themselves that the proposal complied with the terms of the RFP?
Mr. L'Abbé: That is correct, sir.
Mr. Nelligan: So in effect, then, in you checking to see they followed the pamphlets, you would also have to check to see that they had satisfied themselves that the proposal complied with the original request for proposals?
Mr. L'Abbé: That is correct, but also to refer to the proposal too just to make sure.
Mr. Nelligan: Yes, exactly. So you would check the one against the other?
Mr. L'Abbé: That is correct, sir.
Mr. Nelligan: I understand as well that the RFP itself alerted the people who might make proposals to how their proposal would be graded.
Mr. L'Abbé: This was part of the request for proposal.
Mr. Nelligan: Yes. So everyone knew how much weight there would be put to every aspect of its proposal, the marking system.
Mr. L'Abbé: This was done by my staff, but as far as if they would know or not know, I don't know. We started from that point, and all this weight was done. We looked at it. Also it was done by a committee before the evaluation process started.
Mr. Nelligan: I think somewhere in your report you point out the fact that the marking system applied was the same marking system that had been given to the proposers in the RFP.
Mr. L'Abbé: The evaluators?
Mr. Nelligan: No, that the persons making the proposal had been given a set of marking which then was used by the evaluators.
Mr. L'Abbé: I can't recall. I think this was given to the evaluators.
Mr. Nelligan: Maybe I'm wrong.
Senator Kirby: For what it's worth, Mr. Nelligan, he certainly said that he had the same evaluation scoring schedule that the evaluators had. I have never read anything that said that the proponents themselves knew what the weights were.
Mr. Nelligan: It could be in the RFP. I'm sorry. I thought I had read somewhere --
Senator Kirby: I didn't read it there.
Mr. Nelligan: Then was one of your functions to ensure that the evaluators were fair in the way they marked the various proposals?
Mr. L'Abbé: Yes.
Mr. Nelligan: Was there anything in your examination which suggested they were not fair?
Mr. L'Abbé: No, because as I mentioned before, for each of the plans, we tried to get the qualified people to do the plans. We looked to see if the scoring was fair without trying to intervene and say, well, they should have been higher and lower. We just looked at whether to us it was fair. That was the opinion of the evaluator, and then we agreed with that. The only place that we found discrepancies, we reported it in the two exhibits that you have at the end of the report.
Mr. Nelligan: Did you find any evidence of bias?
Mr. L'Abbé: No.
Mr. Nelligan: It would appear that the name of your firm was taken in vain by a book author a short while ago. They suggest that one of the auditors on the case admitted to a senior transport department official that he had been ordered to "find it fair". Are you aware of any such conversation?
Mr. L'Abbé: No, because our assignment was not "to find or not to find". It was just to make sure that the work that has been done by the evaluator was made according to the methodology and it was fair. Then we had to give an opinion on that.
Mr. Nelligan: All right. Did you get any orders from any transport department official other than the ones included in your original mandate?
Mr. L'Abbé: Would you state your question again.
Mr. Nelligan: Did you get any orders from any Department of Transport official about how you should conduct your audit other than those included in your original mandate?
Mr. L'Abbé: No.
Mr. Nelligan: Thank you. Those are all my questions.
The Chairman: I just have two questions, Mr. L'Abbé.
Yesterday, in a question to Mr. Lane, he replied:
We had no external pressures to go fast. As a matter of fact, we were told there was lots of time."
It would take "whatever time is required". And it goes on:
...but we thought to have credibility, and again to keep control of the process and discharge it quickly, get it done before it became a real issue on where we were and the second guessing started and all of that sort of thing.
Then I asked him if the discipline on time and target time was self-imposed, and he said "yes".
Mr. L'Abbé: That is correct. We knew that the urgency of this work -- because when we have such work, it's urgent. I must tell you that the committee -- we followed the committee's discipline. We started up as early as seven o'clock in the first meeting in the morning. In those meetings, we had a representative that was sitting as an observer. We finished late at night, at ten o'clock and night. Toward the end because this was a vacation period and everybody was anxious to get their work done, it did happen, I believe, that on some of the weekends some of the people worked. Some of our staff did work too in order to get this report out.
In the first place, I think the committee and ourselves never thought that we would get so huge amounts of documentation on those reports because there was really a lot of documentation. But, we have never been pressed to prolong the report. We had to do the work and to finish it up.
The Chairman: I understand that the evaluation committee didn't get to see any Blue Jay games that summer.
Mr. L'Abbé: Yes, they did not. They saw the hotel and the airport.
The Chairman: One last question, Mr. L'Abbé.
In the time that you were involved or your associates were involved during that summer, did you in any way see that the process that you were following was in any way flawed?
Mr. L'Abbé: No. I think it was followed very, very carefully. We were there, and if there was a doubt, then at that time we discussed it with the process consultant, and then we agreed on the procedures. So the control was very tight on the documentation itself and the secrecy of the documentation and also in our report and in the PEC report as well.
The Chairman: Mr. L'Abbé, on behalf of the --
Senator Kirby: Can I just ask one short supplementary on the basis of what you said?
The Chairman: Yes.
Senator Kirby: The chairman just asked you, Mr. L'Abbé, whether or not in your opinion, the process was flawed. As I understand it, you never did an assessment of whether the process was the right process.
Mr. L'Abbé: No.
Senator Kirby: The real response you are making, as I would interpret what you are saying, is that the process, as it had been given to you, was correctly followed. Therefore, it wasn't flawed. From the perspective of the process as it was laid out, it was correctly followed. You are not offering a judgment, as I understood you to say, on whether or not the process was the right process.
Mr. L'Abbé: No, it's not a judgment. I'm saying it's the right process, but the process was followed.
Senator Kirby: That's fine, because your answer could have been interpreted both ways. I just thought we should clarify it.
Thank you, Mr. Chairman.
Senator Gigantès: I have a small question.
Did you see any evidence that the public servants with whom you came in any way into contact were dragging their feet or trying to waste time and working against this proposal?
Mr. L'Abbé: No, Mr. Senator. The people that have been working on the evaluation, they were working hard. They were very responsible in their work. They have done very good work. Also, I must say that the people on the committee was qualified based on their curriculum vitae that you see at the end of the Peck report. I asked this question because Mr. Lewis, according to the newspaper reports because I wasn't present, said that the public servants were dragging their feet and trying to prolong the process.
The Chairman: Yes, that was a long time ago.
The Chairman: Mr. L'Abbé, on behalf of the committee, we thank you very much for your assistance.
Mr. L'Abbé: You are welcome, sir.
The Chairman: We will adjourn, colleagues, until next Tuesday at three o'clock in the afternoon.
The committee adjourned.