Proceedings of the Special Senate Committee on the

Pearson Airport Agreements

Evidence

---

Ottawa, Tuesday, August 15, 1995

[English]

The Special Senate Committee on the Pearson Airport Agreements met this day, at 3 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: Come to order please. Before we begin our fourth week of the hearings of the inquiry on the Pearson Airport Agreements, there are some matters arising from the last day of our testimony which I think Mr. Nelligan will want to refer to.

Mr. John Nelligan, Q.C., Counsel to the Committee: Senators, I have two letters here which relate to matters discussed at earlier hearings. The first is a letter from Mr. A.D. Pascoe. You will recall that he was referred to by Mr. Hession and a number of questions were asked. He writes as follows:

Dear Mr. O'Brien, Thank you for the opportunity to outline to the committee my role with respect to the Terminal Redevelopment Project at Pearson airport.

In March 1990, I was employed as a special assistant to the Honourable Doug Lewis. As the committee is aware, Mr. Lewis was Minister of Transport from February 1990 to April 1991, at which point the minister was appointed Solicitor General of Canada. I remained on the minister's staff until the end of October 1991. After leaving government service, I returned to Toronto to establish a consulting practice.

Paxport became one of my clients in April 1992, when I was engaged to assist them in communicating their plans to redevelop Terminals 1 and 2 to the Province of Ontario, regional and municipal governments in the Greater Toronto Area, business groups, organized labour, and other local organizations. This I did through the balance of 1992 through a series of meetings, presentations, correspondence, and other contacts.

It was not within my mandate from Paxport to lobby federal government politicians or officials on any subject. And in fact, I had no such contact over the course of my involvement as a consultant to Paxport, although I did register Paxport as one of my clients under the Lobbyist Registration Act in early 1993 as a matter of course. At that time, Paxport and Claridge had focused their energies on consummating a merger and on negotiating the terms of their lease with the federal government. I had no role whatsoever in discussions between Pearson Development Corporation and Transport Canada.

I would like to emphasize that my retainer relationship with Paxport did not commence until a full year after I left the Transport portfolio, and even then, my responsibilities involved communications and public affairs activities focused on other levels of government and on non-governmental organizations.

With regard to Section 59 of the Conflict of Interest and Post-Employment Code for Public Office Holders, I would note that the formal Request for Proposals for the redevelopment of Terminals 1 and 2 was not issued until March 1992, five months after I left government service. Until its issuance, there was no specific ongoing proceeding (or) transaction underway.

I may say that we have accepted this letter, but we hope to hear from Mr. Pascoe later in the hearings because I believe some of the senators still wish to ask him some questions.

The second letter is addressed to me as counsel from Mr. George Hunter, who is Special Counsel to the Department of Justice, and that relates to the confusion over the documents which were presented to Mr. Rowat at the last hearing, and as all of the senators have those letters, I do not think I have to read the letter in full.

You will simply note that it would appear that copies of documents were sent in a routine way to the Minister of Justice at the same time as they were sent to the clerk of the Senate committee. It would appear that through inadvertence, as the letter says, a copy in the minister's office did not have the full censure of a particular paragraph. But I think the letter speaks for itself, and if senators have any questions on it, they can raise them now.

Senator Lynch-Staunton: I do have some questions, Mr. Chairman. I am sorry you did not read the entire letter and I hope everyone has a copy. Perhaps it should be read into the record because I understand-

Mr. Nelligan: Very well. All right.

During the course of the Committee's Hearings on August 3, notice was taken of certain matters relative to the version -

Senator Kirby: Can I ask a question? I have no difficulty with reading it into the record except that is time consuming. I am happy to have it included in the record in some way. If there is a particular reason why we need a 10 minute recitation, that is fine. Otherwise I am quite happy to -

Senator Lynch-Staunton: Some of us would like to have it in the record.

Mr. Nelligan:

- certain matters relative to the version of Document 00294 as presented by Senator Bryden to his colleagues on the committee. Mr. Edge and I met with you after the day's adjournment. While we did not then know any details surrounding Document 00294, we undertook to investigate, and I am hereby reporting on what we have discovered.

By way of background and as you are aware by virtue of earlier correspondence and discussions between us, the Department of Justice retained Messrs Scott & Aylen as Special Counsel to assist with various matters relative to the committee's mandate. Specifically, Scott & Aylen was charged with responsibility for the organization of approximately 200,000 pages of documentation relating to the Pearson airport contract. Organization of this documentation was required to permit provision of it to the committee, and to assist the government witnesses, and previously employed government witnesses, in their preparations prior to testifying. Lindquist, Avey, forensic accountants, were thereafter retained by Scott & Aylen, bringing their considerable experience and resources to the task.

When the committee announced its intention to commence hearings the first week of July, timing exigencies dictated that the original plan to have the documentation optically read proved impractical. Copies of all of the documents were made and delivered to Lindquist, Avey on June 13th and immediately work commenced on inputting basic data relative to documents such that they could be recalled by subject matter and potential witnesses. That work has been an ongoing project.

The process thereafter is as follows:

As witnesses are identified and their scheduling becomes known, Lindquist, Avey personnel pull those documents authored or received by the witness, documents in which the witness may be mentioned, and those otherwise relevant for the witness.

Lindquist, Avey personnel involved in this process are subject to a confidentiality agreement.

A team of public servants experienced in matters relative to access to government documentation then reviews the documents based on the principals relating to access of information.

The Department of Justice sends the reviewed documents directly to the clerk of the committee retaining copies for itself and Lindquist, Avey.

Neither Scott & Aylen nor Lindquist, Avey play any role in the review process or the delivery of the documents to the Clerk, save Lindquist, Avey amends the index of documents to accord with any deletions.

And you will remember that the letter "S" appears on censored documents.

To date, 58 volumes of documents have been delivered to the Committee, a volume typically containing approximately 350 pages.

You will recall that both your office and the clerks were advised of the role of Lindquist, Avey, and the ability of Lindquist, Avey to provide further assistance regarding documentary access as the clerk might from time to time require, facts subsequently confirmed in my letter to you of July 7th. Mr. Edge provided further detail on the foregoing process to you by virtue of his letter of July 21st. The clerk's office has sought and received assistance in this context on several occasions.

The exigencies associated with the processes of amassing and reviewing documents, combined with the committee's schedule, has resulted in the situation whereby the delivery of documents to the committee has only been achieved, in most instances, at the proverbial eleventh hour. Even this achievement requires many people involved to work six to seven days a week.

Once the documents are sent to the clerk of the committee, Scott & Aylen and Lindquist, Avey assist Justice officials to identify what issues each witness is expected to address before the committee and what documents relate to each of those issues. Justice officials, or Scott & Aylen with the assistance of Lindquist, Avey, provide this information to the office of the Minister of Justice.

In this context, and relative to the anticipated attendance as Mr. William Rowat as a witness, information was provided to the minister's office by Lindquist, Avey on Tuesday, August 1st. Lindquist, Avey personnel made an error and delivered a copy of Document 00294 containing the full text of the last paragraph, which paragraph had been deleted reference section 69.1(g)

which is the one on cabinet confidentiality.

- in the documents filed previously with the committee.

I am informed by the office of the Minister of Justice that, in preparing Senator Bryden, his assistant not having access to the committee's library because of the lateness of the hour, called the Minister of Justice's office and asked to be provided with the relevant documents for the next day's hearings. The minister's office delivered the document to Senator Bryden not realizing there should have been a deletion.

I may say in parenthesis that we have confirmed that the documents were received by the clerk on the evening of August the 1st and they were made available in copy form to the various members of this committee on the morning of August 2nd, and Mr. Rowat, of course, appeared on August 3rd.

He then goes on,

In addition, it has come to my attention that, during his questioning of Mr. Broadbent on August 3rd, Senator Kirby provided to all members of the committee what he referred to as Document 0020089. Presumably he was referring to Document 002008. In fact, investigation indicates that Document 002008 does not appear under that number in documents filed with the committee.

During the provision of information to the minister's office by Lindquist, Avey on August 1st, Document 002008 was referred to in a copy provided. I am advised by the office of the Minister of Justice that the minister's office subsequently provided Document 002008 to Senator Kirby after a request from his assistant for a document relating to a Diversion Threshold/Capacity Guarantee. Senator Kirby's office was familiar with the contents of Document 002008, albeit not the document itself, from other documents filed with the committee. His office therefore did not realize that it had been provided with a document mistakenly given to the minister's office by Lindquist, Avey.

In this regard, I note that all of the information contained in document 002008 appears in other documents previously filed or otherwise available to the Committee, specifically being Rowat Document 00302, Desmarais Document 00478, Broadbent Document 001682 and Paxport Incorporated's response to the RFP (page D-1-35 of that document.) As will be observed by a perusal of the first several pages of Document 002008, it appears almost identical to document 00302. This may have led to its not being included given the other documentation forwarded to the committee. In any event, I can see no reason why Document 002008 should not be made available to the committee.

The events related to Documents 00294 and 002008 derive from inadvertent errors. To the best of my knowledge and belief, these are isolated incidents. These errors occurred by virtue of a failure to ensure that documents were distributed from the reviewed version. In future, there will be no distribution other than from the reviewed version.

That is signed by Mr. George Hunter.

Senator Lynch-Staunton: If I may Mr. Chairman, I would just like to clarify the role of Scott & Aylen. They were hired, according to Mr. Hunter's letter, by the Department of Justice to go over approximately 200,000 pages of documentation to help this committee and also to assist government witnesses and previously employed government witnesses.

Are non-government witnesses given the same courtesy of having documents screened by Justice and made available to them or is this privilege only granted to, as it says here, government witnesses and previously employed government witnesses? I do not know if anyone here can answer these questions.

Mr. Nelligan: Our practice is when documents are received from Justice, we have made an effort in each case to ensure that the witnesses can review those documents before they testify. In some cases that, of course, has been a short period of time. But we have made those documents available.

Senator Lynch-Staunton: So the documents are made available by the committee, not by the Department of Justice, to the witnesses whether they are government or non-government?

Mr. Nelligan: The government witnesses, we have been told they have already been briefed with them so we have not done it. I am only speaking in terms of witnesses who are not associated with the government.

Senator Lynch-Staunton: Well, the mandate - perhaps we will have to have someone from Justice come and clarify this. Lindquist, Avey forensic accountants. What are forensic accountants?

Mr. Nelligan: They are accountants who get deeply involved in litigation. I am familiar with the role of this particular firm in that I know that they hold themselves available to do investigative accounting, for instance, when there is a need to inquire into some commercial transaction. In addition, they make their services available for the coordination and categorizing of documents in preparation for the litigation process. They are well-known in the field as persons who do organize documents for litigation purposes.

Senator Lynch-Staunton: There is no - is this normal for a government to hire such a firm to go through confidential documents?

Mr. Nelligan: I cannot answer that question.

Senator Lynch-Staunton: Well, I wish someone could because I find it - put it this way, other than employees of Lindquist, Avey subjected to confidentiality agreements, is there any member of our committee staff which also has the same privilege?

Mr. Nelligan: I think the answer to that is no.

Senator Lynch-Staunton: Including yourself?

Mr. Nelligan: That is right. I ask that I be accorded that privilege. It was explained to me that for their own practice reasons that it was not appropriate that I should make a confidentiality agreement, but it would be reviewed in house in Justice and that the Lindquist, Avey staff would make an agreement of confidentiality and we would do the work under our Department of Justice contract.

Senator Lynch-Staunton: You do not know whether this type of arrangement between a private firm and the Government of Canada has been made before for this sort of work?

Mr. Nelligan: I would not know. Quite frankly, Senator, I would not be surprised. It is a standard process where you have a large and complicated file to bring in an outside consultant to do it, but of course I do not know the extent to which the government has followed that practice.

Senator Lynch-Staunton: Go on then to Mr. Hunter's letter where he says so far some 58 volumes averaging 350 pages. That is about 20,000 pages of documentation.

Are we to accept then that the only two documents which were inadvertently released in their uncensored form, that there are only two out of 20,000? It just so happened that the only two that were released that should not have been released are the only ones that were in that category?

What I am trying to get at is what kind of a coincidence is this when we are told that the events - to the best of my knowledge and belief these are isolated incidents?

What we are being told some 20,000 documents screened, some of them whited out, all of them deposited in one form or another before this committee, and on only two occasions two senator's assistants asked the minister for that document because for some reason could not get them here and somehow those documents were released in an uncensored version.

How is it that the odds are such that the jackpot was hit by these two senators?

What I am getting at is quite obvious. There seem to be two rules here. There is a rule for one side where we are abiding by the fact that the only documents available to us are those which are deposited or tabled before the committee, and then there is another rule that if you have access to a minister's office, no matter what time of day or night, you can get the document you want in the form you want. And I find this to the least not exactly the kind of level playing field which we thought we would be on when we started this inquiry.

Now, the evidence points to that. There is one senator here whose assistant was involved. I hope that he can give us an explanation. Senator Bryden, unfortunately, is not here. But certainly he can give us a better explanation. The documents were available in front of the committee in the whited out form for at least a day. They could have been made available through the regular fashion. Somehow, it had to be - one of them in any event had to be found in the middle of the night practically when conveniently a ministerial staff member was available and plucked out the document. It is quite extraordinary service which unfortunately is not available to us.

Those are my comments. If there is no reaction, I assume that my comments are well-founded.

The Chairman: Senator Lynch-Staunton, it may be cold comfort to the committee, but we should be flattered I suppose by the fact that a parliamentary committee has stirred sufficient interest in the Government of Canada to cause innumerable lawyers in the Department of Justice to work incredible hours to prepare documents, to hire one of Canada's leading law firms, who in turn hires forensic auditors - they used to be called private detectives, didn't they?

What we find most objectionable is that the government appears to be still unaware of the rights and privileges of a parliamentary committee to the point where they do not allow the counsel to that parliamentary committee the same privileges as given to the forensic auditors in providing a similar agreement of confidentiality. That is an insult that I think - and I will take this up with the committee - to which a witness has to be called from the Department of Justice. There are too many unanswered questions that have been brought up over the past few weeks.

It will be regrettable if this violation of everything that a parliamentary committee is entitled to receive is going to be frustrated to the degree that only some future political scientist or the Institute for research in the public policy is going to go into this as something for the Queen's Quarterly. It may be too late.

Senator Lynch-Staunton: If I may finish, the role of the forensic analyst, what else - Mr. Broadbent, when he was here said he had been asked to be interviewed by them and refused. Have they or are they interviewing witnesses? Are we aware of that? What is the answer to that?

Mr. Nelligan: I do not know what is happening within the departments. I do know that they did make inquiries of one or two outside witnesses to interview them, and those inquiries were referred to me, but my understanding from Mr. Hunter is that when I spoke to him about it, that practice was discontinued.

Senator Lynch-Staunton: Are we to understand they had a mandate to go and interview witnesses?

Mr. Nelligan: Not from this committee.

Senator Lynch-Staunton: From Justice or from whoever hired them or from Scott & Aylen?

Mr. Nelligan: My understanding, I might be vague on this, it was not their intention to interview outside witnesses, but they did apparently intend to deal - to brief and question witnesses who were either public servants or former public servants. That is my understanding, but I stand to be corrected.

Senator LeBreton: They have now just to clarify, they now say they have discontinued?

Mr. Nelligan: They discontinued speaking to outside persons.

Senator LeBreton: They started to do it.

Mr. Nelligan: They contacted at least two lobbyists, and when I spoke to them about it, they agreed that that was not appropriate.

Senator LeBreton: Is there a gentlemen by the name of Mr. Bibeault working for the firm of Lindquist, Avey?

Mr. Nelligan: I can't say.

Senator LeBreton: Apparently it has been a Mr. Bibeault calling witnesses.

Mr. Nelligan: I do not know.

Senator Jessiman: Do we understand that they are still interviewing in-house people that work for the government that appeared before us? Are they still interviewing them?

Mr. Nelligan: I do not know. You might ask the witnesses here today.

Senator Jessiman: Does the committee know what the mandate is to both Scott & Aylen and through Scott & Aylen through Lindquist, Avey as far as their work is concerned for this committee? I know they are involved as I understand it in a lawsuit.

Do we know what the mandate is as far as this committee is concerned?

Mr. Nelligan: My understanding from Mr. Hunter was his firm had been retained as special advisor to the minister on this particular case. I can understand that on this particular hearing and that he then advised me that they had retained the Lindquist, Avey firm to assist in the cataloguing and preparation of documents, which as I say was not a surprise to me.

Senator Jessiman: Do we know their terms of reference? Do we know what they are being paid?

Mr. Nelligan: I have no idea. That is outside the purview of this committee. This is a direct contract with the Department of Justice.

The Chairman: Senator Kirby?

Senator Kirby: Mr. Chairman, I want to comment on a couple of the issues. I cannot help you at all on the issues of Lindquist, Avey or the lawyers because I never met them. I don't know what they do, I don't know what they are paid so I cannot help you on that. I want to pick up on the point you raised because you and I spoke earlier today. I strongly support your position on it in this regard, that we certainly had a number of documents appear before us which had sections excised out on the grounds either the Access to Information Act or of cabinet confidences.

I think one of the reasons why you and I jointly supported Mr. Nelligan being our counsel was precisely because we thought that having a senior and distinguished member of the bar would ensure that when documents were excised out, because we both knew at the beginning some would be, that Mr. Nelligan would be able to give us some assurance that the X-ing out was consistent with the practice.

I share your view that in fact we ought to have - to get back to Senator Lynch-Staunton's point - we ought to have one member of our staff, Mr. Nelligan, able to assure us that the excising out is consistent with the law. To that extent, I am more than prepared to support you in having Mr. Nelligan immediately sit down with the most senior officials, if necessary, in the Department of Justice and see if we can resolve this problem. There is no question this was an issue you and I had talked about. We were both on the same side at the beginning, I believe we are still are. I am glad to help you on that score.

Just a few points on what Senator Lynch-Staunton said, because I think there is something he missed.

With respect to the document that my staff arrived at, I had already asked a number of witnesses questions relating to the diversion threshold and the $33 million and the $39 million and the $35 million and what it was. Unfortunately, if you saw the pile of paper in my office, we were simply unable to find the document that in fact I wanted. I knew the numbers in my head, but I didn't get the quote.

So what happened was my research assistant simply contacted the Minister of Justice's office and said effectively, we know we have the document on threshold diversion. Can you send it over? He sent over the wrong one. The issue was before the committee before I ever raised it, just not in that particular documentary form. I thought I should clarify that point because Senator Lynch-Staunton was looking at me for an answer.

I repeat on the first point, I am more than prepared to support the view that Mr. Nelligan ought to be able to assure us that when we get an excised out document that it has been excised out consistent with either the cabinet confidence issue or the access to information law.

Senator Lynch-Staunton: One question and a comment. Mr. Nixon was able to do a thorough review of the Pearson contracts in 30 days. Do we know what material was supplied to him to allow him to do such a review in so short a period? Are we missing something here? Should we not rely on what he got rather than go through these 200,000 documents? Do we know what was made available to Mr. Nixon?

Mr. Nelligan: The first documents we asked for were all the materials made available to Mr. Nixon, and we received some of those documents, a number of which were excised in the traditional form. But, we were then advised that some of the other documents were in effect cabinet confidences because in effect they were attachments to the submissions to Treasury Board for approval at the various stages of the contract.

It had been hoped, as I understand it in discussions with Privy Council, that they would be able to release most of that supplementary material because they could establish that it existed in a non-confidential form somewhere else. I haven't heard back yet as to the success of that, but there are still some of the reports that Mr. Nixon obviously had which have not come directly to us.

When you read Mr. Nixon's report, of course, it is apparent that he was able to read senior departmental's recommendations on matters which must have been in the Treasury Board approvals, and I am hoping we will get that before Mr. Nixon is here.

Senator Lynch-Staunton: I suppose, Mr. Chairman, I will conclude on this, perhaps we should be flattered that the Government of Canada has found it necessary to hire outside talent to help it react to the Senate's decision, unanimous decision by the way, to have this inquiry.

On the other hand, if these efforts are being used to favour one side at the expense of the other, then we should be highly disturbed to what the purpose of getting the forensic experts and the outside lawyers really is.

I find it Mr. Turner's letter is to say the least -

Senator Kirby: Mr. Hunter.

Senator Lynch-Staunton: Mr. Hunter - I am sorry - is a major effort in trying to - not cover up, I do not like that term - but excuse what to me reads to be a deliberate handing over of documents to members of this committee which should not have been done.

Hopefully, it will not be done again. It will not be done again. It should not be done again because I will quote to all members what Senator Fairbairn said on the motion to set up this committee speaking for the Government of Canada. So if I read into the record it is to remind the Government of Canada what the spokeswoman said in the Senate at the time.

We will take our responsibility seriously to ensure that the process is fair and balanced. We will seek to help to produce a result which will clear the air surrounding the Pearson airport issue.

Before that she said,

We will engage fully and actively in a committee study.

Now that first part is being honoured, but unfortunately, I don't think that the process so far is as fair and balanced as it should be. Certain members of this committee are getting certain advantages which are not made available to the other side. Being on the government side itself has advantages, and being on the opposition, by necessity, naturally give its disadvantages but, one should not compound one at the expense of the other. That is all I have, Mr. Chairman.

The Chairman: On this same point?

Senator Tkachuk: Just on the clarification of this process, here. And the reason I am bringing this up, Counsel, is so that if there are any unanswered questions, we may be able to write these people a letter and get some of the answers.

My understanding is they get all the documents together in Transport, Justice, wherever these documents exist, and these are bureaucrats who get these together, departmental officials and bureaucrats and then, they take these raw documents and ship them over to the law firm who then ship them to the forensic firm?

Mr. Nelligan: They go to Lindquist, Avey.

Senator Tkachuk: They go directly?

Mr. Nelligan: That is right.

Senator Tkachuk: They are supposed to be going through these documents to ensure that the freedom of information problems are -

Mr. Nelligan: They take them and catalogue them in a computer and assign numbers to them so they can be referenced either by date or person. So that the first instance, Lindquist, Avey give them a catalogue number and put them into the computer. Then they are sent over to a group of experts on access to information regulations who go through it and identify those passages which they feel would normally be deleted if an application was made under access of information. They then send them back to Lindquist, Avey.

Senator Tkachuk: Do they send back the blanked out copies or - the blank out copies?

Mr. Nelligan: I can't tell you that. They send back a version of it, in any event, that indicates the passage that should be deleted.

Senator Tkachuk: They would compile these records, then they would ship them back. Departmental officials then go through them and say, "we do not want that, we do not want that."

Mr. Nelligan: In fairness, I don't think they say, we don't want that. They say this comes under section so-and-so of the access to information.

Senator Tkachuk: I am stating my opinion, Counsel. I am saying, "we do not want that, we do not want that." Then, the raw documents or is it the excised documents that go back to Lindquist, Avey?

Mr. Nelligan: That particular mechanical process I cannot explain any farther. I was told the documents were returned to Lindquist, Avey, and my understanding was the actual physical whiting out of the document would be done by Lindquist, Avey and those square brackets that we have now seen so often.

Senator Jessiman: They are told what to white out?

Mr. Nelligan: Yes.

Senator Jessiman: By a group of experts?

Senator Tkachuk: So then they get them back and they white them out and they bind them.

Mr. Nelligan: They send a copy to the Senate committee, to the Minister of Justice, and to the Department of Transport.

Senator Tkachuk: Well, you see, here they say that they sent over an uncensored version back to the official, back to the department, the minister's office. Personnel made an error and delivered a copy of document 00294 containing the full text of the last paragraph, which paragraph had been deleted reference whatever, and the documents filed previously with the committee.

So the reason I am asking this question, if they have received back the censored version from the department and they are doing all this, how could they have possibly sent back the uncensored version to the department?

Mr. Nelligan: I do not know.

Senator Tkachuk: Well, maybe we should ask them how that happened? Do they have two sets of documents there, the uncensored version sitting at Lindquist, Avey? We want to know why they sit there? And then the censored documents which then go back to the Department of Justice. Do they store these uncensored version in the minister's office?

Mr. Nelligan: I would assume, senator, that the raw documents which come in their native state from the department would remain untouched with Lindquist, Avey to ultimately be returned to the department, and it would be copies. In each case, it would be transmitted for review and copies which would then have the passages deleted. Just as a mechanical process, that seems to me what they would do. I am speculating.

Senator Tkachuk: They would have a full set of copies of uncensored versions in the minister's office?

Mr. Nelligan: Those would be the originals. Not in the minister's office, in Lindquist, Avey's office.

Senator Tkachuk: Well no, because he said that he got the copy that Lindquist, Avey sent over documentation 00294 with the full text. My view would be that he would not have sent - I would not have sent this one document over here in full text along with the uncensored documents, and then Senator Bryden's office luckily getting that one document. I mean, I should get Senator Bryden to buy me my lottery tickets here. It is impossible to do.

Mr. Nelligan: I do not think I really have to make any comment on that. It is just that is what they say happened.

Senator Tkachuk: As I have explained previously in this committee, I have not from the very beginning liked the way this document process has been going, and I have been very suspicious about these huge two departments, Transport and Justice, both who have lots of lawyers, we have a law firm, we have a private detective firm which calls themselves forensic accountants going through this, that are sworn to secrecy, where they will not allow you to be sworn to secrecy, and then they come up with this excuse, which to me makes no sense at all, because I cannot imagine Lindquist, Avey sending out one document. They would have sent over a book of documents.

Therefore, the minister's office must have - we are not talking the department working at night. We are talking him calling the minister's office and an executive assistance answering the phone, and lo and behold, I have all the censored documents and I have all the uncensored documents, and I pull out the uncensored documents and send them over to Senator Bryden. That is what they are saying here. That is exactly what happened. There was not one envelope. There had to be a book of all the documents prepared for August the 3rd.

And so, I would like to know whether executive assistants to the Liberal senators are also getting briefed on the uncensored versions.

Senator Kirby: Categorically, the answer is no.

Senator Tkachuk: But the executive assistants in the Department of Justice have access to these documents. They can obviously read them because they have access to them.

Senator Kirby: I do not know whether that is true. Clearly one got sent to us by mistake. Whether they have all the others, I do not have the foggiest notion.

Senator Tkachuk: If they can read them, surely they must be having coffee together. They are reading these documents.

Senator Kirby: I resent the innuendo of that. No one on our side working for our staff has had any of the kinds of things that Senator Tkachuk is suggesting has happened. I think I ought to be taken at my word. That is categorically, absolutely, not true. You may wish to believe it was true because you may even think it helps your case, but the reality is that that is not true.

Senator Tkachuk: I would like to have someone from Justice come here and explain what this is all about. I would like to know the paper trail of these documents. I want to know the people that are involved in them. I want to know the rank in their company, because to me, as the chairman has said, this is a parliamentary committee. If a company called Lindquist, Avey can see all the documents and investigate all this stuff and make these decisions or help make these decisions it seems - and for all I know the interviewing witnesses that are coming forth here - then surely we can have them too.

Senator LeBreton: Can I ask a question on chronology?

The Chairman: Let us try to shorten this up a bit. We have two lines of questioning going on here. One is supplementary questions to the point that we are discussing, and the others are the senators who wish to address the issues now to the witnesses.

Now, I think first of all, Senator Kirby, did you have something?

Senator Kirby: Just to inform the committee, you know this and our counsel knows this, but this is just to make it clear to the committee on the documents question. I have asked the counsel to look into the issue of whether or not documents which have been filed - I think filed is the right word - in connection with the court case in Toronto and which may well pertain to witnesses who are coming down the road, specifically beginning next week with the lobbyist, whether or not those documents can be made available to us. They have not been made available to us by any of the lobbyists, although we have asked for them.

My question is, if there are such documents in the court case, I assume there must be, my question is given the fact that they have been filed with the court, can they also be filed with us? I understand not being a lawyer that there is some legal questions of whether or not that is possible. Everyone should know I asked the clerk to look at that. I asked counsel to look at that. I do not know what the answer is. I just want you to know.

Senator Jessiman: With consent of the parties, counsel has said he thinks that is being cleared.

My question though -

Senator Gigantès: There is not consent of the parties.

Senator Jessiman: Is there not?

Senator Kirby: All I was telling you was what I asked the counsel to do. I think in a few cases there is not consent of the parties. It just seems to me that if documents have been filed for a court case, we ought to have access to it. That is all I wanted to say.

The Chairman: Two more supplementaries on this. Senator Gigantès, did you want a supplementary?

Senator Gigantès: I made an illegal interjection.

Senator Jessiman: I am glad Senator Kirby has said what he said. Our counsel can now look at the documents.

The Chairman: Unfortunately, Senator Kirby does not have the power.

Senator Kirby: I support our counsel looking at the documents.

Senator Jessiman: If he is going to be looking at these uncensored documents and there are other experts now, it says a group of experts, so I am asking counsel, is he going to be satisfied that he can do this on his own, or does he think he may need help, and if he does, he should get it.

Mr. Nelligan: We should leap that style when we get to it. Let us see what they will be able to let me do, because at this point the answer has been no. If it is possible, I would simply point out that even now, as I look at a document, I can sometimes suggest gently to our legal representatives, that does not appear to fall within the normal scriptures, and they have been gracious enough to agree with me on a number of occasions and release the full document.

I accept the fact that in the pressure of this particular volume of business, that some errors will be made so that I do get co-operation. The trouble is in most cases I can't tell whether it should be questioned or not. But if I am given the privilege, and there are still a lot of documents to look at, then we will look at the labour required to do it.

Senator LeBreton: One quick question, senator, and it is on Senator Tkachuk's chronology on going through this. What therefore is the role of George Hunter, because we talk about Lindquist, Avey, Department of Transport, back to Justice. George Hunter - I think I remember distinctly when we closed off the session when we last met, our counsel asking Senator Bryden to provide a letter of explanation with regard to this document, and then we get this letter from George Hunter of the firm Scott & Aylen. Where does he fit in all this?

Mr. Nelligan: He is special advisor to the Minister of Justice on this particular problem.

Senator LeBreton: So rather than Senator Bryden, as you requested, answering to the committee about this document, Mr. Hunter, Special Counsel to the Department of Justice answered?

Mr. Nelligan: I don't think Senator Bryden could have possibly answered the question. Mr. Hunter and his firm was engaged to advise the minister in the appropriate way to which documents could be made available to this committee and to assist in the flow of documents. I may say he has been very helpful and it has been very useful to me to have him under my conferences with representatives of Department of Justice. He has been of great assistance to me. So he is generally there to ease the way and act as a special advisor on this matter. What else he does for the Minister of Justice, I do not know.

Senator LeBreton: So he is a special advisor to the Minister of Justice on all matters of documents going back and forth and perhaps other matters concerning this inquiry?

Mr. Nelligan: He is an advisor on documents and on the production of witnesses and assisting us to keep the thing flowing along.

The Chairman: Okay. Now, I will end this now. I thank you very much, Senator Kirby. You and I will get together and discuss the possibility of getting a witness who might assist us.

Senator Lynch-Staunton: And having our counsel having the same -

The Chairman: That will be the point.

Senator Kirby: May I just say, given the heat we have adopted the rule here that you can take your jackets off, so feel free. Some of us have already done it. This room will get pretty hot by the end of the day. Thank you, Mr. Chairman.

The Chairman: Witnesses, I want to thank you for making yourself available for this afternoon, this evening and tomorrow morning as well. Colleagues, these three gentlemen are important witnesses for us as a committee. Mr. Desmarais and Mr. Jolliffe have been involved in one way or another through the whole process of the Pearson airport development process, and of course Mr. Rowat, while familiar with the situation before he assumed his task as Associate Deputy Minister of Transport, he was in the PCO with responsibilities for economic development.

His role, of course, particularly interests us, is from June 17th, 1993 as its chief negotiator on the Pearson agreements. He is as you know now Deputy Minister of Fisheries and Oceans.

If I may summarize what we have heard during the last week we met, we heard Mr. Broadbent tell us that this contract was "in the public interest" and was "a good contract for Canada." He talked with some pride about the negotiating procedure, particularly the stewardship clause and the settlement effect in relation to the transfer of employees from Transport Canada to the Pearson Development Airport.

He also attested to a major stumbling block he encountered, the so-called "Air Canada sandwich", the fact that Air Canada had or purported to have a long-term lease already negotiated for T2.

We heard of certain frustrations he encountered during his time as chief negotiator. Mr. Rowat took over as chief negotiator in mid-June 1993 and was responsible for the successful completion of the contract negotiations, along with Mr. Jolliffe and Mr. Desmarais.

As I believe all of them know at this stage, one of the main reasons - not the main reason - for the cancellation of the Pearson contract were the conclusions reached in the Nixon report.

These three witnesses met at some length with Mr. Bob Nixon. Mr. Rowat stated on August 3rd, and I quote, "my team and I cooperated fully with Mr. Nixon and his team in their review. As well, Mr. Jolliffe was part of the evaluation team, and Mr. Desmarais was involved actively in the whole process."

There are a number of questions or issues concerning this deal which have emerged in the questioning of witnesses in the past three weeks. They have concentrated on whether or not this was a rush deal put together in haste or was it simply the culmination of a long, slow process.

Was the process skewed so that Paxport would win the competition? It has been suggested it really was all a sham with the purpose of fooling the public into thinking that a real competition was taking place. Or, was it the process described by Dr. Labelle and David Broadbent, a process described as tough negotiations leading to what Mr. Broadbent described as "a contract that was good for Canada".

In any event, the witnesses before us will be of great help to us in getting at the answers to these questions. Before I turn the questioning over to the senators, I wish to put some general overview questions which may set the stage for today and tomorrow morning.

We have heard in earlier testimony that there was a rush to get the Pearson deal done. As a matter of fact, in a general perusal of previous hearings, I counted no less than 25 references seeking to show that the Pearson development deal was somehow rushed. The vast majority of these references came from Liberal senators on this committee.

As I understood it, the project was a government priority. Successive Ministers of Transport said so. Pearson needed to be fixed, and this was stated over, and over, and over again by politicians at the federal, provincial and municipal level.

My first question is, where was the rush in something that took three years to accomplish, or was the word "rush" possibly an exaggerated characterization? Mr. Rowat?

Mr. William Rowat, Deputy Minister, Department of Fisheries and Oceans: The word "rush", you are quite right, was used many times I guess in this committee, but also during the latter stages of the negotiations.

Prior to my arrival as chief negotiator, there had been I think the better part of two to two and a half years of preparation and various processes that had been gone through, and then the best overall proposal was identified and notified in early December 1992.

At that point, I think that the government felt that the government and the companies felt that it would be a matter of months, certainly no longer, a matter of months before this set of negotiations and the various questions surrounding the issue of financeability could be tied up.

There was throughout that number of months reference to - I think probably the best way to put it is a number of deadlines, but certainly I think one was April, and then finally there was another one of May 31st, which was one that my predecessor very clearly was mandated to work towards. I think that certainly in my experience at the PCO during that period, May 31st was clearly a deadline that all parties, ministers, officials, felt should be one that we worked towards.

Whether you can term that rushed, six months to conclude the deal, I guess that would have to be up to senators to judge. But certainly, the government and ministers at the time did not feel that that was asking too much of officials.

The Chairman: Also I suppose could be, without getting into semantics, could be referred to as being fast tracked, as a term?

Mr. Rowat: I would just say that I think when the original discussions started in December when the best overall proposal was identified, that number of months was felt to be an appropriate time. In fact, I think my predecessor had indicated up until the very late stages of May that he was still working towards that as a deadline, and clearly left the impression that it was achievable up until the very late stages of May.

The Chairman: Well, witnesses might be reminded or might even remember the former Liberal government's program, the acronym was SRCPP, the Special Recovery Capital Projects Program, which the Liberal government announced in early 1983. That was characterized as a fast track program aiming at moving $2.4 billion of Public Works and government procurement projects at maximum speed. The idea was to help the economy rebound more quickly from the '81, '82 recession and to create jobs.

Transport Canada - and I am sure Mr. Jolliffe, Mr. Desmarais would remember this - benefited significantly from that program. You funded and built the terminal facilities at Hamilton airport, made improvements to the airports at St. John, Winnipeg and Regina. You also built $680 million worth of Coast Guard vessels in record time. Is it fair to ask was that fast track program ever characterized as a rush at that time?

Mr. Desmarais: My recollection was no, it was not.

Mr. Keith Jolliffe, Financial Advisor, Aviation Group, Transport Canada: I was not at Transport Canada at that time. I joined in 1988 and started with basically the Pearson project.

The Chairman: Similarly, one of the first acts of the present government was the announcement of a $6 billion infrastructure program to upgrade local services, and that also was fast tracked to ensure that jobs were recreated for Canadians. Is it not then usual to fast track proposals that are full of job creation possibilities? Is that not a fair statement?

Mr. Rowat: If it is a criteria laid out by the government as a priority to fast track or to move a project quickly to create job employment, if that is one of the criteria used, then ministers are quite within their prerogative to ask officials to move a process quickly.

Mr. Desmarais: Before you go on the SRP, the scrap program as we called it internally, the fast tracking was for government approvals only. It went through the normal tendering process and everything else and took the normal length of time for tendering and for final negotiations of contracts.

The Chairman: How long did it take, do you remember?

Mr. Desmarais: We started the program, I cannot remember the exact dates. It took a year to 18 months to get approval at the time. We were down to six months by the end of the program to get approvals, and then we were into construction after that. The airport at Whitehorse was one I recall. I got the approval under SRP and we completed it in 1989 when I was out in Edmonton. So it took the normal construction - followed the normal construction program after approvals.

Mr. Rowat: If I could just add one rider, while I wasn't at Transport Canada, I was certainly at another major line department at the time. There is a difference between certain kinds of projects, and I think most senators and certainly ministers and most politicians are aware of it. Things that governments contract for directly often take less time than a major Crown project where you may be turning over a major service which, by its very nature, could be far more complicated in its negotiation.

The Chairman: Mr. Rowat, the Pearson negotiating procedures seem to be divided into three phases. There was a financeability phase, Broadbent overall negotiating phase on all issues and what we call the Rowat clean-up phase which reached conclusions and addressed the thorny Air Canada issue. Is this an accurate characterization of the negotiating process?

Mr. Rowat: Overall, it is probably not bad. The clean-up phase might be considered maybe somewhat derogatory to my predecessor. There were a number of issues left outstanding that I brought to a conclusion, some of which he had brought very close to a conclusion, and others, and specifically the Air Canada issue was left on the table which is one that I brought to a conclusion with the minister's direction.

The Chairman: I accept that. I did not mean anything derogatory to your predecessor.

Mr. Jolliffe: If I may, senator, the financeability phase as you called it was more than financeability. We had a lot of other conditions that we had to check into with leases and licenses and other things that we had found throughout the evaluation process, so that first phase was not just concentrating on financeability but identified a lot of other issues that we had to properly identify and put a context to for the negotiations.

The Chairman: Yes, thank you. Now, Mr. Rowat, you described in your last appearance that in its negotiations, the government had three guiding principles, and I quote you now:

Well, the primary perspective - the primary principle was that the government should be no worse off financially than under other alternatives, like operating itself, and so on. So that - and the final rent reflected that, the final rent to government.

Quoting you and to continue:

A second principle would be that the airport itself remain competitive, particularly in the North American continent and, I suppose, internationally. But that relates to the cost per passenger of running an airport. And then, thirdly, that imposition on airlines and passengers - I suppose, if you see reflected, the airlines pay more or less, then that ultimately walks through to the passengers - that they not be subjected to an onerous burden.

That is direct quotes from you.

Do you as negotiators believe these guiding principles were respected in the contract that you finalized?

Mr. Rowat: Yes. I should say at this point, those guiding principles, when you were asking in that context, were what I felt to be an outline of the principles as expressed in the RFP. And I think I quoted the spirit of those guiding principles well. Yes, I agree that I think those guiding principles were met in the final agreement.

The Chairman: When the present government faced the cancellation of the EH-101 helicopter program and the review of the Pearson agreements shortly after its election in 1993, criticism was levelled at the Pearson deal, because it did not include a cancellation clause whereas the helicopter deal had the standard termination for convenience. The difference was held up by some as evidence of some sort of skulduggery between the former government and the Pearson Development Corporation.

Now I am sorry to go over this again, but is it not standard practices in the leasehold agreements not to include a cancellation clause. For the record, would you explain why?

Mr. Rowat: Perhaps I could call on Mr. Desmarais to do that, but just an early comment on it. In leasing arrangements like this, we rely on Treasury Board advice, and specifically at that time the Bureau of Real Property Management. Their advice generally is that with contracts like this that the lessee would not be able to get the financing that would be appropriate for a project of this size if the government could at its convenience cancel the project. So that my understanding is that its not unusual that this kind of contract not have a cancellation clause in it. John might want to add something.

Mr. John Desmarais, Senior Advisor to Assistant Deputy Minister, Airports Group, Transport Canada: Not much more to that sense. In normal leases with Transport Canada in the private sector we do not include cancellation clauses basically for the reason Mr. Rowat explained. What happens when you sign a long-term lease with a cancellation clause is it basically becomes a month to month lease, and people will not finance month to month leases with anybody, especially for anything approaching the $400 to $500 million of financing we were looking for here. Even in smaller leases they will not finance unless they have a term certain, and that is what we are looking at here.

The Chairman: So, the cancellation clause in a leasehold agreement would be an unusual exception?

Mr. Desmarais: That is correct.

The Chairman: You could not get mortgage financing?

Mr. Desmarais: Generally, if you put a cancellation clause in a lease you would have to have some type of government guarantee of the financing.

Senator Hervieux-Payette: Mr. Chairman, just on that point, for my own understanding when you talk about the cancellation clause you talk after the contract. I was under the impression when we were talking about a cancellation clause was before everything was signed and that the government decided not to sign.

For me there is two very different implications. If you have not started the contract, and if you have not given any contract to the - usually you can say and I think we have in the request for proposal a general clause saying that the government is not bound by the request for proposal, but since we started with the RFP, the contract was awarded to one party and then we proceeded to negotiate with another party and finally to have the Mergeco.

When we are talking about cancellation clause, I was under the impression that we were talking about cancellation clause of saying the government say, well, we have almost finished the negotiations, but there are different steps and different approval steps in government contracts. Before everything is signed and there is final cabinet approval, Treasury Board approval and so on that all the necessary steps have been gone through, that the government would have more or less in the letter of understanding some kind of a cancellation clause saying well, we are very far into the process but we want to cancel and we will reimburse expenses that were more or less defined in some kind of a letter of understanding.

So when you talk about cancellation I never thought that - I have never heard too that there was a cancellation clause once you have finance and you are operating under a lease.

Senator Jessiman: That is what the report says.

Senator Hervieux-Payette: So, just to make sure that we are all discussing about the same thing.

The Chairman: I didn't mean to confuse you. I am talking about a cancellation clause in an agreement that has been agreed to by all parties. I am not talking about - obviously, we have a cancellation here, but it was not a cancellation clause in the contract. I was talking about a cancellation clause in the agreements which these gentlemen negotiated and which was finalized.

Senator Hervieux-Payette: Okay.

The Chairman: Mr. Broadbent testified he dealt with numerous officials to ensure that he was being true to the original proposals. Could you tell us how you satisfied yourself that you are not going beyond the original proposals? And I do not know if this document has a bearing on it, but I assume it has, but correct me if I am wrong. You have written to Mr. Coughlin on document 00174 on July 13th, 1993 and you say, you are writing to Mr. Peter F. Coughlin and you say:

As I mentioned to you in our meeting, the leasehold mortgage provisions we wish to see in the ground lease should track fairly closely with the Vancouver LAA document. Ministers are very concerned that we do not stray from the LAA principles in this regard. Therefore any opportunity for creative problem solving are fairly limited. I would hope that you can direct your legal representatives to be mindful of these circumstances. Could you then tell us how you satisfied yourselves that you were not going beyond the original proposals?

Does this letter refer - are we on the same subject?

Mr. Rowat: I think that a representative issue of the principle that you are trying to establish how we satisfied ourselves that we were in the context of the original RFP and instructions for ministers. And I think the best way to answer your question is that there was an RFP. There was a best overall proposal that was declared, that the firm that had that proposal was notified that the government would be negotiating various elements of that proposal with them, and then during the succeeding months within the spirit of that original RFP, the principles and the proposal, we followed what I would call and what the government calls due process. That at every stage where there was a major issue to be resolved and to ensure that the minister and ministers were satisfied that we were within the confines of the agreement, due process was followed.

Now let me just basically comment on due process. Due process in government means that a minister consults his colleagues on issues that affect the mandates of other departments and hence the mandate of another minister that have broad political importance to the government of the day and/or are an extremely sensitive issue and could have regional implications.

Once a minister consults with his colleagues, then if there are financial implications, due process would dictate that the minister would then take it to the Treasury Board.

In all cases during this negotiation, due process was followed. I think that is probably the best way to answer your question.

The Chairman: Thank you. Throughout the whole process, even before the issuance of the request for proposals, Transport Canada seemed to be concerned, and I believe rightly so, with the financial aspects of a leasehold privatization move. Price Waterhouse was retained to give Transport some idea as to the commercial opportunity. Price Waterhouse was asked to audit the evaluation process. Raymond Chabot were also heavily involved. The evaluation team also hired Richardson Greenshields. Deloitte Touche did two reports in the last nine months, one on financeability and the other on the financial aspects of a negotiated deal.

Later on, were you as negotiators for the government satisfied with the overall return to the government and to the investors?

Mr. Rowat: In the final analysis, that is a question that a minister and ministers must resolve. Given the criteria that we set that this proposal - that this project be better than the next best alternative, the overall return to government met that criteria.

With respect to the return to investors, the advice that we had from both outside and inside officials and experts, and I can refer you to Paul Stehelin's memo which I think is in your set of documents, is that the return to investors was within an acceptable range.

The Chairman: Yes. And did you?

Senator Gigantès: That is the Mergeco deal?

Mr. Rowat: That is Mergeco, that is correct.

Senator Gigantès: That statement does not apply to what Paxport wanted as a return to management before the Mergeco deal?

Mr. Rowat: Paxport started out with a rate of return requesting a rate of return or proposing a rate of return that was considerably higher. But I think the question was, was the final arrangement an appropriate rate of return? Mr. Stehelin's advice was that it fell within an acceptable range according to various comparisons that he made.

The Chairman: I want to return to the Air Canada lease issue just for a moment. The whole story with regard to the Air Canada lease seems quite odd to me. Are any of you aware as to why no mention of the purported Air Canada long-term lease was not included in the request for proposals? Can any of you throw any light on this from what you heard or saw or became aware of?

Mr. Rowat: Perhaps I can start out with that, and then the others can join in. When I took over the file in June, this was, as I said, the outstanding issue. I asked for a full briefing on this issue of the Air Canada lease and the possibility that it might actually exist beyond the - that there may be a commitment beyond the 1997 end of the then-current lease. There was a concern, I think, as Mr. Broadbent had stated to me and testified before this committee, that in fact there was a 1989 document which made reference to this possibility of extending the lease beyond 1987 - beyond 1997.

In my review of the documents and my discussions with staff at the time, it became clear to me that the issue was not quite so clear cut as everyone, and certainly my predecessor, had felt. And in fact, the person involved was Mr. Power at the time of negotiating the RFP. And the documentation which was drawn to my attention indicated that he and colleagues at that time had in fact consulted on two occasions with - two, maybe more occasions - with Air Canada, encouraging them to bring forward their concerns, their views on the upcoming RFP. And in fact, I think there is a document in your papers that indicates that Air Canada actually had a copy of the appropriate section of the impending RFP for their comment. So that in my review of the documentation, I felt the issue was not quite so clear cut as had been conveyed to me in taking over the file.

Senator Jessiman: That would help you with your negotiations?

Mr. Rowat: Yes. And at that point, I was looking for a very clear picture of whether Air Canada was raising this as some leverage or whether it was in fact a real concern.

My estimation at the time was that Air Canada's real concerns were, number one, they had invested $65 million in the preceding years, and they wanted to make sure that they were repaid for the undepreciated balance of that; that number two, in the short term, the remainder of the lease through to the end of 1997, that they had a very real concern given their own financial state and the financial status of the industry that they simply couldn't afford what was being proposed in the Paxport proposal; and number three, beyond 1997, my own assessment was that Air Canada knew that changes to the airport would have to be made, improvements would have to be made, but that they felt that the overall charges to the airline industry were higher than they needed to be and they should be.

And that was my assessment of what their position - their bottom line position really was, and that they were looking for the best possible arrangement at that time and using whatever leverage obviously a good negotiator would use in that set of circumstances.

The Chairman: But somebody solved the problem. Did you gentlemen solve it, or were you spectators while Air Canada and the Pearson Development Corporation tried to work something out?

Mr. Rowat: When I took over the file in mid-June, I think I mentioned before that we prepared negotiating positions in a black book with all of the issues, including the Air Canada situation.

At that point, I realized, as did Madam Labelle, that while our position had been with the - with Mergeco that, "Over to you, this is your problem to solve with the airlines," that that position, given the situation of the lease overhang, and given the concerns that Paxport - that Mergeco had raised about the documentation not being in the room and so on, that there was a whole lot of confusion surrounding the issue.

That's when, using my newness as the negotiator, I agreed that I would go to a meeting between the two parties as an observer, and it was possibility - you could construe it as a way of getting them into the same room with a federal person there, but I was strictly an observer. And both sides undertook or recognized that, that my attendance represented nothing more than that. It offered me a opportunity within the first ten days on the job to - first ten or twelve days on the job to size up the situation with respect to Air Canada as well as Mergeco's position on the issue. As I mentioned to you before, the day of the meeting between the two of them was June 28, and I took that occasion as well to meet separately with each one of them on that day or the day before.

So that coming out of that set of meetings, I had - with the advice of my own staff, I had a pretty good sense in my own mind as to where the major hurdles were. And at that point, I felt the next step was to get the direction of the minister.

The Chairman: So you're satisfied that the agreement that was reached between Air Canada and the Pearson Development Corporation was one which Air Canada and Transport Canada could live with?

Mr. Rowat: Well, Transport Canada and the minister and the government announced on August 30 that they could live with it, yes. In fact, that they had entered into an agreement at that point, as did Air Canada. During the summer, Air Canada had come to the conclusion as well with the various changes that had been made to the government ground rent, as well as to the rate of return for Mergeco, Air Canada felt with those various changes that they could sign onto the arrangement as well, and they were part of the actual announcement on August 30.

The Chairman: I see. Okay.

Mr. Desmarais: Just to follow up on that one, Senator, Air Canada appeared before the standing committee on transport on Bill C-22 and supported this deal and said they had got a good deal out of it.

The Chairman: Yes. Okay. Well, having gone through the pre-RFP process, the RFP, the evaluation of the bids, the negotiations, the agreement, do you believe, or did you even suspect, that the whole process was a cooked-up scheme whose results were pre-ordained in some machiavellian way even before the negotiations started? Did you ever, ever come to that conclusion?

Mr. Rowat: I have no facts or access to facts that would support that kind of a thesis.

The Chairman: Mr. Jolliffe? Mr. Desmarais?

Mr. Desmarais: I agree with Mr. Rowat.

Mr. Jolliffe: I absolutely agree with Mr. Rowat. I have no knowledge of it.

The Chairman: Finally, my colleagues will, I'm sure, want to touch on various conclusions and statements put forward by Mr. Bob Nixon, but I have concentrated on three conclusions put in his report recommending the cancellation of the contracts. He wrote:

To leave in place an inadequate contract, arrived at with such a flawed process and under the shadow of possible political manipulation, is unacceptable.

Could each of you comment on these three criticisms of a process you were very much a part of? Mr. Rowat first, did you feel that you negotiated an inadequate contract?

Mr. Rowat: I negotiated a contract that met the requirements and the criteria as agreed to by the government of the day, and, as I indicated to you earlier, the appropriate steps and what we call due process were followed. And as a senior civil servant, I was satisfied that I achieved for the government the objectives that they set out for me. That concerns the inadequacy of the arrangement.

The flawed process: during my tenure from the middle of June on, the appropriate processes were followed. And again, I would emphasize due process of the meetings of ministers and the appropriate approvals by the appropriate bodies.

With respect to political manipulation, I did not feel during my tenure that there was any political manipulation.

The Chairman: Would it be fair to say that you've answered "no" to all three questions?

Mr. Rowat: Yes.

The Chairman: Mr. Jolliffe?

Mr. Jolliffe: I share Mr. Rowat's views entirely.

The Chairman: Mr. Desmarais?

Mr. Desmarais: I believe, sir, I said in my cross-examination in the litigation that, looking back at the contract, there was certain clauses I'd love to renegotiate, and I still believe that, but that is all in hindsight. At the time, I believed the contract was adequate.

The Chairman: Thank you very much, gentlemen. You have been very, very helpful.

Mr. Nelligan: Did you ask Mr. Jolliffe?

The Chairman: Yes, I did.

Mr. Jolliffe: Sir, I said I agreed entirely with Mr. Rowat's comments. Also, I would support Mr. Desmarais' comments. When there is eloquence, you can't improve on it.

[Translation]

Senator Hervieux-Payette: Mr. Desmarais, with a name like that you must speak French, and I wanted to have at least the advantage of speaking my own mother tongue.

As far as I can gather, you may be one of the people who has been at the Department the longest. So with you we can go through the whole sequence - preparing the RFP, drawing up the assessment criteria, the assessment - you followed the whole process from start to finish. You were there before it all began.

Mr. Desmarais: That's right.

Senator Hervieux-Payette: The [Air Canada] guiding principles keep coming up. Who was responsible for setting up, so to speak, when you and the team prepared the request for proposals, normally all the contracts, the leases, all the things that have financial implications for the people who going to submit a proposal, are included in the documentation which in this case should have been in Toronto, I imagine. There was a special data room where people who wanted to submit a proposal could go and consult all the documents. I want to clarify this. It's something that everyone came across because the process went on for 18 months. All at once, at the last minute, it turns out that one of the cornerstones of the deal, the contract with Air Canada, which already had commitments, had after all been spending money, wasn't included. You talk to Air Canada on a regular basis. You've just carried out an upgrade of Terminal 2 in conjunction with them. These aren't people you just speak to occasionally.

My question is the following. Were all the [Air Canada] documents part of the RFP information package?

Mr. Desmarais: No.

Senator Hervieux-Payette: Who was responsible for putting that package together, for organizing all those leases and financial documents in that special data room?

Mr. Desmarais: It was Mr. Power in Toronto who did it, in collaboration with Mr. Gerry Berrigan of Ottawa.

Senator Hervieux-Payette: For instance, who negotiated the guiding principles since they're always referred to as a document that really committed the federal government and Air Canada to dealing together for much more than just after 1997. We saw the document. There's no one who reviewed the process from A to Z as regards the legal documents.

I realize that at the Department of Transport, you have lots of technical people, engineers, who administer an infrastructure that is ultimately quite technical. There was no one on the legal side, the Department of Justice, no one pointed out this shortcoming, because it was your tenant, to all intents and purposes, in the terminals, at least the biggest one. It seems to me that that's an essential piece of documentation for an RFP. So there was no one who could have produced the document and said, "We're going to make these two concerns available and privatize their operations," but no one thought of including the lease or the government's commitments? I'm not pointing a finger at anyone. I'm not trying to dig up guilty parties. I'm trying to understand how with a whole team of experts an RFP could have been drawn up without including the lease of the main tenant of the establishment.

Mr. Desmarais: May I reply in English?

Senator Hervieux-Payette: Yes, I have no problem with that.

[English]

Mr. Desmarais: When we put together the data room with all the data, we had some legal advice. We put in there all the leases, licenses, and contracts in place at the time at Pearson so that any legitimate bidder could review those and use the information as he saw fit in the preparation of his bid.

The one contentious piece of documentation was the Air Canada guiding principles. At that time, a decision was made that that would not be a - that was not a binding agreement. Only binding agreements went into the document room.

There was a lot of contention around the Air Canada guiding principles, one because, a year before, Paxport had written to us in 1990, and so had Air Canada, completely supporting the Paxport proposal at that time, which was an unsolicited proposal. You heard, I think, Mr. Hession say that Air Canada and Paxport split some time before the RFP because we had asked for Air Canada's input into the RFP. Again, Air Canada was silent on the guiding principles for that input. So the decision was made in the bureaucracy that it was not an agreement that should be put forward, and that's why it didn't go in the room.

[Translation]

Senator Hervieux-Payette: So the people who were responsible for preparing the RFP were aware of the document. They simply chose not to put it in the data room where all the other documents were.

Mr. Desmarais: Yes.

Senator Hervieux-Payette: I understand that. When you say, and I recall the testimony...

[English]

Senator Tkachuk: Can I just ask a supplementary? Who participated in the decision?

Mr. Desmarais: I had discussions with Mr. Berigan, as did Mr. Jolliffe at the time. I believe Mr. Berigan made the decision and had it subsequently ratified by the assistant deputy minister and the deputy minister of the day.

Senator Tkachuk: Isn't that strange. Because Mr. Barbeau says he has no idea.

Mr. Desmarais: As I say, I believe. I was reporting to Mr. Berigan, and where he went for ratification I am not exactly certain, but it was ratified.

Senator Tkachuk: Okay. Thanks.

Mr. Jolliffe: If I could just correct that statement, I did not know of the availability of the guiding principles document when I was working with Mr. Berigan. The only participation I had in input to the RFP was on some financial criteria which I sent forward based on the T3 documents, so I had absolutely no knowledge of the guiding principles until much later. When we had gone through the evaluation, we had no knowledge of those guiding principles during the evaluation. It was much later on, around March, I believe, of '93, when we found out the significance of that document.

Senator Tkachuk: Thank you. Sorry.

Mr. Nelligan: May I assist the senator here? This might explain part of it. There is a memorandum from Mr. Power to Mr. Green dated June 21, 1993, enclosing an earlier document, the document -

Senator Hervieux-Payette: Which number?

Mr. Nelligan: At the top its 520213; on the bottom its 483.

In any event, there was a letter to Mr. Berigan from Mr. Desrochers of Air Canada on March 28, 1991, and on the last page, page 520219, there is the following reference:

Simply stated, Air Canada will everything in its power to prevent such an auction -

They were opposing an RFP at the time.

- from occurring and will vigorously and publicly oppose an RFP process that seems to lead in that direction. Air Canada will, in addition, insist that its non-cancellable lease, which effectively extends through to April 30, 1997, be fully recognized and Air Canada's rights thereunder, including rental rate reviews based on current cost-recovery policies, be protected and maintained.

This was a letter that was in Mr. Power's possession, and I can assume that, on the basis of the inferences there, he might well have thought that, at that moment, they were not relying upon the 22 principles. I just put that in because it seems to be relevant to why Mr. Power may have made that decision at the time he did.

Mr. Desmarais: Mr. Power did not make the ultimate decision; Mr. Berigan did, in Ottawa. But he was aware of that.

Mr. Nelligan: Yes, the letter is to Berigan. That's quite right, yes.

Senator Hervieux-Payette: Thank you. At least we start to clarify that question of why this document remained as a key to make the transaction at the same time, came in at a very, very late hour, even after both proposals were made.

And of course, Mr. Chairman, I am a bit puzzled by the fact that Paxport and Air Canada had seemed to have had a very good relationship until the day that Mergeco arrived. I mean, there was for a long time a good - if they even sent a letter of support for the unsolicited proposal, they were certainly having some agreement, and on rentals and things like that, because you don't agree to a deal that doesn't make sense. I mean, probably they were happy with what was proposed in the unsolicited proposal. But we are not going to enter into the unsolicited proposal. We have enough with what we have, unless my colleagues want to have some questions.

From the original Paxport proposal, I mean, I guess the one that is called the best overall proposal - maybe I will learn that in three months - and the Claridge proposal and the final deal, I mean, what were the deal breaking thing? I mean, for instance, we look at the evaluation criteria for the Paxport, and there were of course 45 points that were attributed for the financial question and 30 points for the business plan. And at the end, just six weeks after approving, I mean, there is a Mergeco that arrived because the financial viability of the deal is not there.

Senator Tkachuk: Point to the evidence on that.

Senator Hervieux-Payette: I'm just doing like -

Senator Tkachuk: Don't read The Globe and Mail. Where is the evidence that it wasn't a viable deal?

Senator Hervieux-Payette: I'm sorry, Senator Tkachuk. I'm reading notes that I prepared for myself. Okay? So I am just going back, because we haven't met with these gentlemen for two weeks.

Senator Tkachuk: Where in the testimony do you find that, so that I can look it up myself? It would help me, and maybe help the witness.

Senator Jessiman: Recite the evidence.

Senator Tkachuk: I want to see it. You made the statement. Where is the evidence?

Senator Hervieux-Payette: In all the documents that you received.

Senator Tkachuk: I want to see it, then. Quote them.

Senator Jessiman: Or you can give it to us later if you've got it. We suggest you haven't got it.

Senator Hervieux-Payette: You have the same documents. I'm not going to refer page number, number by number.

Senator Jessiman: When I give mine, I'm going to tell you where I find it.

Senator Gigantès: Didn't Deloitte Touche say that there was no financeability? There was a report to that effect.

Senator Tkachuk: There was two. There may be.

Senator Gigantès: They approved the financeability after Mergeco was created, of course, deep pockets of Bronfman, but before Mergeco they said there was no financeability. That's what she's referring to. How could you -

Senator Tkachuk: That's not what they say.

Senator Gigantès: How could -

Senator Tkachuk: Where do they say that, senator?

Senator Gigantès: - a bid be declared as the best when -

Senator Tkachuk: Ask the witnesses. That's why they're there.

Senator Gigantès: All right. How could a bid be considered the best when the financeability was in doubt?

Mr. Desmarais: Senator, the request for proposals required proof of financing before signing the lease, not previous to that or any other time.

And the December 7 letter that went out from Mr. Barbeau to the proponents announcing the best overall made two points. One was the condition of the airline industry, which since August had been in merger discussions between Air Canada and Canadian at that time, and there was some uncertainty as to whether or not the major tenant would remain a major tenant of a new leasehold. So that was referenced in the letter, as was the statement that Paxport should talk to its stakeholders. In Transport Canada parlance, stakeholders generally means your lessees as well as your shareholders, and I think there was some misinterpretation of that statement.

So what we were telling Paxport at the time was to go out and talk to the airlines to see if they were still willing to come into this deal and lease from them, or whether we were going to be dealing with another airline entity.

Senator Gigantès: But there was a report by Deloitte Touche which cast into doubt the financing by Paxport.

Senator Jessiman: Not the financial position of Paxport. Whether their plan, whether their proposal, was financable, because they were getting a lot of their money from the airlines. The witness has now explained that the airlines may no longer exist. They may no bankrupt.

Senator Gigantès: So how can you possibility describe as the best bid a bid that -

Senator Jessiman: Ask the witness.

Senator Gigantès: You tell me. How could you describe it as the best bid when there was another bid about whose financing there was no doubt?

Senator Lynch-Staunton: The financeability.

Senator Gigantès: financeability.

Senator Lynch-Staunton: The problem existed for both bidders.

Senator Gigantès: Not according to Deloitte Touche.

Senator Lynch-Staunton: Ask the witness.

Senator Gigantès: We have the Deloitte Touche report.

Senator Tkachuk: If Senator Hervieux-Payette had quoted accurately, we wouldn't be in this discussion.

The Chairman: Let's not talk over one another. Let's try to do it one at a time. Senator Payette.

Senator Hervieux-Payette: Well, I was referring to the first proposal that was declared the best overall proposal that was supposed to produce $2.523 million under the Paxport initial proposal that was judged the best one. And then at the end, we arrive at 1.043 under the Transport Canada base case, and then of course we change the figure. But you approved the best overall proposal with a certain number, a certain return, providing that they could raise the Air Canada charge by nearly four times.

So I mean, you were aware at the time of the financial difficulty of the airline industry, I mean, when you decided that this is a proposal that makes sense. I mean, if they put assumption that they might pay four times, it's one thing. If they will pay, because they have the financial capability, and I'm referring to Air Canada, that was going through difficulty at the time, as well as Canadian. I mean, we remember the time when that time.

I mean, how could you say that and attribute the points instead of saying that this element of the proposal does not make sense. It won't happen because it's impossible. The airlines would go bankrupt. I mean, the way you set up - and I know that we refer all the time to 29 booklets that we haven't seen, but how could you put facts that would never become reality?

Mr. Jolliffe: Maybe could I help, senator. During the business plan evaluation stage, we had set the criteria for the financial plan and the financial offer. And I think one has to recognize that's a fairly sterile situation. We're locked up in Toronto going through proposals which are projections put together by both proponents with a view to a future that might or might not take place. We had to identify whether we thought there were certain conditions there that might impact on those futures. We did that, and we identified them.

But when we came out at the end of the day with quite a wide range between the two positions, one that we described as incredibly aggressive and one that we've described as also incredibly conservative, it was a fair slope that we could fall down in terms of dealing with the issues of the affordability of this to the airlines, the affordability to the passengers and the travelling public, the ability of Paxport to negotiate those leases with the tenants and with the airlines once they had the right to do so.

And what Paxport was looking for all along was to be recognized as having the right to represent itself, as having the opportunity to negotiate those leases, and they were constantly asking for legitimization. The proposals were evaluated, and you heard from Mr. Lane about that process. It was a sterile condition that we were in. At the end of the day, we knew nothing really about the other issues of financeability that come to, if you wish, the deep pockets of a Bronfman backing an ATDG bid or even the financial conditions around the Matthews Group, which was one of the consortia members, not the consortium. Paxport was a number of companies. But we had only basic financial information on them.

Obviously afterwards we wanted to find out, and I did that with Mr. Stehelin, of Deloitte and Touche. We wanted to find out exactly what the other backgrounds were around what one could call soft equity and other conditions particularly for Paxport at that time.

But we had a very big difference between the two proposals, and therefore we had questions to ask and to put forward to the negotiators later on that they would have to resolve before putting forward to the government the final deal for recommendation.

Mr. Desmarais: Senator, if I could add to that, I believe in February, late February of '93, Wood Gundy wrote to the Minister of Transport and said that the Paxport proposal was financable, but there were still questions. That was an opinion expressed by their consultant, if you like. They would finance them or get them financing on the market.

Senator Hervieux-Payette: I read the letter, and they wouldn't get much money in the bank for it. I mean, they said that they would undertake to do it, but they were not committed to do it. It's different to say that I will try to do it and doing it. It's not the same thing when you talk about financing a project.

My question on the -

Senator Tkachuk: Was it the letter on the proposal that you read that? Where was the letter from that you read about the financeability or the financing?

Senator Hervieux-Payette: The Wood Gundy letter that you have in your pile of documents. I mean, there is a letter. I mean -

Senator Tkachuk: The number is?

Senator Hervieux-Payette: I don't know. If you want to ask to look into the pile, I may be able to find it and refer it to you, but -

Senator Tkachuk: It's no problem. I just wanted to know.

Senator Hervieux-Payette: We have 20,000 pages to look at. I'm sorry.

Senator Tkachuk: We all have 20,000 pages to look at.

Senator Lynch-Staunton: I wonder if they are the same ones.

Senator Tkachuk: You have maybe more reading to do. That's why it may take you longer.

Senator Hervieux-Payette: I think I have good staff preparing good briefing notes.

Senator Tkachuk: Continue, senator.

Senator Hervieux-Payette: I'm sorry, but I don't think we are making jokes about the way you work. I just would appreciate that you take seriously what I'm doing, because I'm doing my job seriously, senator.

Senator Tkachuk: I do.

Senator Hervieux-Payette: I mean, I would appreciate that when I'm referring to documents that we have seen several times, if you want the quotation each time, it will take twice as much time.

Senator LeBreton: We just want the document number.

Senator Tkachuk: When you make a statement that I haven't heard before or haven't read before, then I'll ask for the document. So when you made that first statement - senator, I apologize if I offended you, because I didn't mean to, but when you made the statement, there was no document, and that's why I thought maybe I was - there was another missing one that I didn't have.

Senator Hervieux-Payette: Well, I am not that suspicious with all the documents we are buried underneath. I am trying to find my way, the way you are. I try to have a summary of each document, but I may not be able to quote each time I make a sentence about a document sometimes that we have seen three times. I have not the memorize the numbers as well.

Senator LeBreton: Put the number with the question when you put your questions.

Senator Tkachuk: No problem.

Senator Hervieux-Payette: I don't have anybody preparing my questions, Senator LeBreton. Okay? May I ask my own questions personally?

The Chairman: Order, order. Senator Hervieux-Payette, please, to the witnesses.

Senator Hervieux-Payette: Thank you.

Well, let me take you back to my notes. I'm sorry. I am referring back to your evaluation process. And for this, today I haven't brought my evaluation book. I mean, I do bring as much paper as I can, but there is a limit to what we can consult. But in the evaluation that you conducted, there were passenger fee or passenger facility charge.

I mean, was it contemplated, I mean, when you were analyzing in all your booklet that we haven't seen, did you consider all the revenue flow and what was the maximum and the minimum for each item that was supposed to produce a revenue? I mean, rent from the stores, rent from the garage, rent from the parking and everything? What were the assumptions?

Or were you just taking the I would say reference to what was happening in Terminal 3, for instance? Did you use as guidelines Terminal 3?

Mr. Jolliffe: Senator, we did not have the Terminal 3 documents at all, so we had no knowledge of the current prices in Terminal 3, but what we did have were two proposals which addressed in their own ways the revenues from airlines and the revenues from those concession areas related to the passenger through-put and what they called in some areas the propensity of passengers to spend money, and that was particularly in the concession areas.

We looked at those revenue numbers as a reality check in one sense to say, is that realistic to think that those sorts of revenues could be earned from those passengers. Was it realistic to think that the rates to airlines could be increased by the amounts that they thought they could increase? We did our evaluations, and we took certain sensitivity attacks at these numbers. What if the revenues were to drop by 10 per cent, or what if the capital expenditures were to increase by 25 per cent? What if the operating and maintenance expenses were to be more or less than stated? What impact would that have on the bottom line?

So we tried to bring a sense of reality to it, but we couldn't compare them to the rates in Terminal 3, because that was a private sector-operated terminal, and we didn't have that data before us.

But let me also add that neither of the proponents proposed a passenger facilitation charge. ATDG had what they termed an additional revenue from airlines that had the notion of value of a passenger facility charge, but that was in the ATDG proposal, not in the Paxport proposal.

But we never considered a passenger facility fee as being something that we would want to rely on. We wanted this to be a user-charge-based revenue stream.

Senator Hervieux-Payette: But since you wanted to establish a competition between the two, I mean, at least Terminal 1 and 2 and Terminal 3, which was the whole spirit, I mean, of this exercise, of the RFP, at the beginning, and we have just - we have two entities. At that time, I mean, was it high marks because they were providing more revenues than Terminal 3, but how would you be certain, not certain, but at least make it realistic, that you would receive that amount of money, which of course we see at the end of the day never materialized, but because we didn't have that deal that was signed? But I mean, you considered, analyzed and said that this is the realistic amount of money that will return to the Crown, and/or at least the deal is worth that amount of money. Each item, I mean, has been carefully examined, and we arrive at the end of the day with another deal that is for me seemed to be more realistic.

My question is, what would be the normal process under government procedure when the first bidder is not meeting its own commitment of the proposal that it has made? Is it that you ask one and two to merge, or you go to the second one?

Mr. Jolliffe: Let me answer this. The first point, I think, senator, is that both proponents, both proposals, were found to be acceptable. And the Paxport proposal was the best overall acceptable proposal.

From there, perhaps Mr. Rowat should talk to the process, but we ended our evaluation with that point of view and had a number of conditions that we - a number of issues that we were concerned about, that one would want to deal with in negotiations. And that is a - that's the first base for us, that we could only see within a sterile environment, no participation with the proponents whatsoever, no opportunity to question them in depth about major items at the end of that evaluation process would have to come subsequently to a recommendation.

Senator Hervieux-Payette: But in your experience with government, usually when the first bidder has been awarded the contract and doesn't meet all the clauses that they have committed to realize, I mean, don't you go to the second one and ignore the first one, because they haven't met all the requirements of their own proposals? Because actually, you accepted that as the best overall proposal, which means that then they had to live with it. You realize that they won't be able to live with it, then why didn't you go - why wouldn't the government or why wouldn't the analyzing team say, "We should go to the second?"

Because I mean, sometimes you have four bidders that could realize, and you take the one that is serving best the interests, and certainly the one that is in the best interests financially, but also making sure that it's going to happen. So why wouldn't you go or why was not the decision to go with the number 2, that you knew that was already operating Terminal 3, and let the first one who was not able to comply with its own proposal?

Mr. Jolliffe: Simply, senator, because the second proposal, ATDG's proposal, also had conditions, so both proposals had conditions that had to be remedied for them to be totally acceptable. Basically it would have been beautiful if we could have taken the document and said, "Sign here. We're prepared to sign there."

They were saying things to us that required the government to agree to certain things. Both proposals were saying, "We expect that the government will ..." Well, to answer that question, we had to put that question before the government to say, "Are you prepared to accept this as a condition of accepting that proposal?"

With both conditions having those conditionalities around them, the one being better than the other, we stayed with the Paxport proposal and recommended that as the best overall, but still subject to these issues that had to be remedied, as we had other issues in the ATDG proposal.

Mr. Rowat: If I can just add a comment on that. We negotiated with Mergeco on the basis of the Paxport proposal and concluded the set of negotiations on that. And the set of negotiations came up with an overall set of financial results that in fact were superior to the Claridge proposal. The bottom line, and you have this in your documentation, and I don't have the number right off the bat, but -

Senator Kirby: Better be careful. He's going to get upset with you.

Senator Gigantès: You'll upset Senator Tkachuk.

Mr. Rowat: I won't refer to a document, then. All I will say is that the return to the government in the final analysis was higher than that proposed in the ATD original proposal; that in fact the debt and equity arrangements were in the same range as the original, and that various of the other factors were - cash flow factors as well, were preferable. So that - and I think that is in the document, in the deck that is provided in your documentation.

So in the final analysis, the arrangement that was struck with Mergeco on the basis of the Paxport proposal, even though it was less in terms of returns to the Crown, it was still higher than the original ATD proposal.

Mr. Desmarais: May I comment too, senator? I want to go back to the process a bit. When you go out for a proposal, a tender, whatever, you set up evaluation criteria with scoring, and two things happen. One, you get no bids, and I'll speak particularly to a lease situation. If you get no bids, government process allows you to go out and negotiate with anybody you feel like negotiating with or whoever you can interest in the proposal, if you receive no bids.

If you received one bid, you generally evaluate it. If it meets a base minimum, you will negotiate with that person.

If you receive more than one bid, you will do an evaluation and you will pick the highest scorer, and you will start negotiations with him. If those negotiations fail, then you will go to number two.

What happened here is we started negotiations with Paxport, they became Mergeco, and ATDG removed their proposal from the table on May 3. So we were dealing with only one proposal after May 3. If the negotiations failed, there is no proposal on the table after that point.

Senator Hervieux-Payette: But what you're saying, and I understand quite well, is that once you didn't go much further than six to eight weeks after the Paxport proposal was declared the best overall proposal, the Mergeco arrived, and Mr. Hession said that he was called and asked to create Mergeco and to make some arrangement by somebody. Any one of you are aware of that telephone call?

Mr. Desmarais: No, ma'am.

Mr. Rowat: No.

Senator Hervieux-Payette: Mr. Rowat, you were not there, so you were probably not the one making the phone call to Mr. Hession.

Mr. Rowat: No, I was not.

Senator Hervieux-Payette: Okay. Thank you. I'm asking that because I have the feeling that when we are making a proposal, and I know how much it is difficult, and we work hard. I worked with SNC, and when we were making a proposal, the first reaction is certainly not to merge with the person that has won and then was discarded. The first reaction is, they have - they're not able to make it, and we'll sit at the table and we'll make the deal.

This is the normal procedure any time, I mean, you are in a bidding process, whether it's at the federal, provincial or municipal level, that once you have discarded the first one who was selected, for all sorts of reasons, because this is not abnormal that one condition is not met before you finalize the transaction.

But what I find strange is that they were not discarded, and somebody suggested somewhere that we don't know of that they should merge, and then Claridge came on. And I know that of course, they probably would have preferred to have the 100 per cent interest, but they remained the controlling interest, so of course it was better that than nothing.

But, Mr. Chairman, I mean, I think we need to clarify why the standard practice, which was when you don't meet the criteria, you are excluded. Normally, you just are.

Mr. Desmarais: Senator, the evaluation process said they met all the criteria, and they scored the highest. That's what the letter said on December 7. They had the best overall acceptable proposal, and "acceptable" is a very key word there, that they met the criteria for acceptability of their proposal, i.e, they met all the criteria of the RFP.

Senator Hervieux-Payette: Providing they would meet all the conditions that remained to be solved.

Mr. Desmarais: Providing they met all the conditions we then subsequently imposed, because they asked for things from the government that we weren't prepared to give them.

Senator Hervieux-Payette: So that means that if these conditions were not met -

Mr. Desmarais: Then we would have taken it off the table, but all those conditions were met subsequently, so.

Senator Hervieux-Payette: But not by Paxport. By the new company.

Mr. Desmarais: Based on the Paxport proposal. It was only the Paxport proposal that we were negotiating.

Senator Hervieux-Payette: Yeah, but many of the items that we find in the - if I refer to your evaluation, many of the items that were proposed by Claridge came back more or less as a compromise to the Paxport criteria that Paxport -

Mr. Desmarais: There is only one that I know of, senator, and that is the use of Terminal 3 on the closure of Terminal 1. If you know of others, we would like to know about them, because that's the only one I can recall.

Senator Hervieux-Payette: Okay.

Senator Lynch-Staunton: Let's be clear about that. There were no deviations from the Paxport proposal following Mergeco's entry on the scene.

Mr. Desmarais: There were negotiated changes to the Paxport proposal.

Senator Lynch-Staunton: Negotiated changes, yes, but always based on the Paxport proposal.

Mr. Desmarais: Always based on the Paxport proposal.

Senator Lynch-Staunton: That's key, and hopefully everybody has heard it. Thank you.

The Chairman: Now, colleagues, we were going to break at 5:30. And since I've been very generous to myself and Senator Hervieux-Payette in the time we have used, I'm going to now impose the 30-minute time limit.

Senator Jessiman: Thanks very much.

Senator Lynch-Staunton: Thank you.

The Chairman: That will take you nicely to 5:30, Senator Jessiman.

Senator Jessiman: I'm going to produce the copies that I'm going to refer to.

Senator Hervieux-Payette: Mr. MacDonald, I remind you that I took 30 minutes providing the fact that we had the discussion that were not part of my questions.

Senator Jessiman: I will distribute these pages now, then.

Senator Gigantès: I do not see any document number on these. What are they?

Senator Jessiman: They're out of the book that you have got, but I didn't expect everyone to have the book. I'll explain it. Just wait.

Senator Gigantès: The document number. It must have -

Senator Jessiman: No, I don't think it has a document number, actually. It was outside, actually, the briefing book. It was a document that was given to us. Actually, this is photostatted so each page is - the one we received had a front page and a back page, and I found it much easier to follow if I just had a front page. I had it photostatted.

Senator LeBreton: It was a document that was brought the first evening by -

Senator Jessiman: It was a chart that was given to this committee on July 11, 1995, by Mr. Mulder.

Senator LeBreton: By Mr. Mulder, the deputy minister of Transport.

Senator Jessiman: I'm going to direct my question to Mr. Desmarais, but if Mr. Jolliffe can answer as well, because I didn't know at the time that he'd been around that long in Transport Canada, 1988. And some of this I don't think goes back any further than that.

The thing that we are going to be talking about now are the unsolicited proposals. In Mr. Nixon's report, and I've given you page 1 of it - I'm just going to read that part, and it's the third last paragraph of page 1. I've marked it as page 1. Mine was not numbered. The other pages seem to be, but page 1 was not numbered, so I've just, on the right-hand side, put a "1" there. The third last paragraph on that page says:

In September, 1989, the Matthews Group submitted an unsolicited proposal to the Government of Canada to privatize Terminals 1 and 2 at Pearson. This proposal was not accepted.

Then at page 8 of Mr. Nixon's report, it says this:

The RFP having as it did only a single stage and requiring proponents to engage in project definition as well as proposal submission and, all within a 90 day time frame, created, in my view, an enormous advantage to a proponent that had previously submitted a proposal for privatizing and developing T1 and T2. Other management and construction firms not having been involved in the maneuvering preceding the RFP had no chance to come up to speed and submit a bid in the short time permitted. With little construction and development occurring others should have been sought out and given reasonable time to participate.

Now, from reading this document, if one reads the Nixon report, one, it doesn't say explicitly that it is the only unsolicited proposal, but it's the only one he refers to. And then when he's referring on page 8, he says "a proposal", so I took from reading it that there was only one.

Now, I gave you also a document that was given to us by Mr. Mulder on July 11, '95, and on it here, we see in September, 1989, is the proposal to privatize T1 and T2 received from Paxport. Then we have got in July to October, 1990, it says:

Unsolicited proposal -

It doesn't say "proposals". So I'm going to ask you a question on this, if you can answer it.

- to modernize T1/T2 from: Canadian Airports Ltd., Airport Development Corporation.

My first question, is this one proposal by two companies, or is this, as far as the chart is concerned, if you know, one proposal from each of those companies?

Mr. Desmarais: It's one proposal from each company.

Senator Jessiman: And now, I should further ask, do you know who prepared this?

Mr. Desmarais: I believe it was prepared by my staff, sir.

Senator Jessiman: Your staff. Well, it's not important, but the information I have, it isn't quite correct. I want to just see if you can confirm or not. If you look at Canadian Airports, and as you know, in our binder, I should have given copies, I'm sorry I didn't, but in the binders, we also, right at the front, have the consortia. I'm sorry, I should have made copies. Tab C. And it refers to the Canadian Airports. It doesn't say "Limited", but that's the same company -

Senator Hervieux-Payette: Which number?

Senator Jessiman: It's Tab C of our briefing book, the blue book you have. I'm sorry, I should have made copies, and I forgot.

Senator Tkachuk: You're not drawing any conclusions.

Senator Jessiman: I just wanted to help the senator, and I just want Senator Hervieux-Payette to understand why we want her to tell us where they are so we can follow it. It makes it so much easier.

Anyway, Canadian Airports is the same Canadian Airports that was part of this proposal at one point. Because they were the consortia, and you've given us the breakdown, and British Airports Authority.

Mr. Desmarais: That's correct.

Senator Jessiman: Right? And they withdrew after some period of time.

Mr. Desmarais: They withdrew I believe sometime in '92.

Senator Jessiman: Right. Okay. Now -

Senator Gigantès: They didn't resubmit, did they?

Mr. Desmarais: No.

Senator Jessiman: No, they did not resubmit. You're perfectly right.

Senator Gigantès: The statement that the T1T2 initial submission gave T1T2 a great advantage in that 90-day period, since that other one didn't one resubmit -

Senator Jessiman: Is that evidence, or is that what you think you would like them to - have you got the evidence?

Senator Gigantès: That's what Mr. Nixon said.

Senator Jessiman: Oh. Oh.

The Chairman: Let us not talk over one another. The court reporters can't get this clear. If you want to interject, just put your hand up and ask for a supplementary, but don't interject between witnesses.

Senator Jessiman: I'm the one that's examining, Mr. Chairman.

The Chairman: I understand that.

Senator Jessiman: Please, for goodness sake.

Senator Gigantès: You're interjecting all the time.

Senator Jessiman: For goodness sake, please. All right. We are clear on that. With the help of the senator, he says they didn't - they were part and they - you also admitted that they didn't make a proposal eventually.

Now, the next one is Airport Development Corporation. Now, that one isn't mentioned in the consortia that we were given on page - but you know and I know and now everyone will know that Airport Development Corporation was Huang & Danczkzay. Right?

Mr. Desmarais: That's right.

Senator Jessiman: I've got to go back to the first one, though, because you said in this chart that it came in July of '89, and my information is it was submitted May 3, 1990, and you say July, '90.

Mr. Desmarais: That's correct. I didn't say particularly it was received here. It was examined here. When we looked through our files, that's where we found it, in a July file.

Senator Jessiman: I see.

Mr. Desmarais: It was probably received a bit earlier.

Senator Jessiman: It was May. Canadian Airports, the ones that started in the proposal, then withdrew. They are the people that had the British Airports Authority as part of them.

Then the Airport Development Corporation, which is the Huang & Danczkzay who won the bid for Terminal 3, and they made an unsolicited bid, and I'm told - you say here in the chart that that was still July, between July, October, 1990. I'm told it went first to Minister Martin on March 10, '89; then it went to Transport Canada on March 29, '89; and then it went to Minister Bouchard on April 19, 1989.

Mr. Desmarais: Again, I'll stand by my earlier statement that's it's probably in a July file in our office, but it could well have been received earlier.

Senator Jessiman: If you find that my information I'm giving you is incorrect, that is being supplied to me by others, and but I'd just like to - even the chart, you see, as you look at the chart, the first thing one sees in this chart, 1989, after the announcement that you're going to do new runways and some restoration work, there is the unsolicited proposal to privatize T1 by Paxport, whereas if we'd had it kind of earlier on, we would have seen in March of '89 there was this other one. I just wanted to point that out.

Senator LeBreton: Were those the only three?

Senator Jessiman: Let me, please. It's my turn.

Senator LeBreton: I was just wondering.

Senator Jessiman: No, there are others.

Senator LeBreton: I see.

I'm told - you can correct me if I'm wrong - that there is a fourth proposal submitted by Air Canada on May 15, 1989, to the Honourable Doug Lewis by Pierre Jeanniot, president and CEO of Air Canada. Can you tell me if that's correct?

Mr. Desmarais: I don't recall that one, sir.

Mr. Jolliffe: I certainly recall that proposal, senator, yes.

Senator Jessiman: And I am told - I want you to confirm or otherwise - that it was for an 80-year lease and an option term. Is that correct?

Mr. Jolliffe: Eighty years?

Senator Jessiman: I'm told. They are unsolicited proposals, and I'm just being told that that was the case.

Mr. Jolliffe: I don't remember that part of it, but I certainly remember it was a substantial lease term. Maybe 60 years, but not 80.

Senator Jessiman: There was a fifth proposal submitted by Air Canada on June 1, 1990, to the Honourable Doug Lewis by Pierre Jeanniot, and it was a Paxport plan to integrate Terminals 1 and 2. And my question, is that correct?

Mr. Jolliffe: That's a plan with Paxport, or in support of Paxport.

Senator Jessiman: Yes. I'm told it's a proposal that was submitted by Air Canada June 1, 1990 to the Honourable Doug Lewis by Pierre Jeanniot. It's a Paxport plan to integrate Terminals 1 and 2. I can give you the document number. I assume this comes from the court case, but I'm not positive.

Mr. Desmarais: I don't recall that document off the top either. It might be the letter of support we were talking about earlier from Air Canada on the Paxport proposal.

Senator Jessiman: I was thinking that too, but the point I guess that I'm making is that certainly there were - in this, we have shown that there are five unsolicited offers.

Mr. Desmarais: Yes. Can I go back to June 1, 1990 and one that isn't here as well is that Paxport in that realm after 1989 unsolicited did submit a second unsolicited proposal, and that -

Senator Jessiman: I'm sorry, I didn't quite -

Mr. Desmarais: Paxport did submit a second unsolicited proposal in 1990, and that's probably the one that the Air Canada letter is referring to in June 1, 1990.

Senator Jessiman: Okay. So that would make it six.

Mr. Desmarais: That would be the fifth, with Air Canada support of that.

Senator Jessiman: I see. All right. Now -

Mr. Jolliffe: Senator, maybe one other point of clarification. I think that your comment from the Nixon report that the September '89 Matthews Group - I think that was the Paxport Management Inc. proposal as distinct from Matthews Group Limited, but I think we would have to check that. That might be a slight error in identification of that proposal, unsolicited proposal of September, '89. I don't remember one from the Matthews Group Limited.

Senator Kirby: I think you're right.

Mr. Jolliffe: I think it's Paxport Management Inc.

Senator Jessiman: You're saying the one in '89 is Paxport what?

Senator LeBreton: Management Inc.

Mr. Jolliffe: Which would fit with the document that you have here.

Senator Jessiman: On the one we were given, it just says Paxport Management.

Senator LeBreton: So in other words, the Nixon report incorrectly identified it.

Mr. Jolliffe: Senator, I'm just trying to relate it back to this document. It would in fact match with this statement here that that was the Paxport one. I think that is the one that Mr. Nixon is referring to.

Senator Jessiman: Okay. He thinks it's the unsolicited one of September of '89.

Mr. Jolliffe: Yes.

Senator Jessiman: Actually, I thought that's what he was referring to myself anyway, so I wasn't - now, isn't it true that Airport Terminals Development Group Inc., known as ATDG, actually made a bid? That's the Claridge group.

Mr. Desmarais: That's correct.

Senator Jessiman: Right. Isn't it true there was a response to the proposal by Morrison Hershfield Group, MHG?

Mr. Desmarais: That's correct.

Senator Lynch-Staunton: It was a non-qualifying proposal.

Mr. Jolliffe: There was a response.

Senator Jessiman: I understand they weren't qualified because they didn't put up the million dollars. Isn't that right? They didn't have the financial. But they were part of the -

Mr. Jolliffe: They responded.

Senator Jessiman: Those were two that didn't have unsolicited proposals.

Mr. Desmarais: You have to remember at this time, senator, that the Claridge Group is the T3 limited partnership group which was the T3 limited partnership group that formed Airport Development Corporation at that time, so it's a successor group going down the organizational trail.

Senator Jessiman: But they weren't part of the -

Mr. Desmarais: They were not part of Huang & Danczkzay's unsolicited proposal, but they would have inherited the work that went into it.

Senator Jessiman: Later on.

Mr. Desmarais: Yes.

Senator Jessiman: Right. Now, do you know whether all these proposals were made public? Maybe I should - my understanding, and maybe you can correct me, and this is again someone has told me this, that the Paxport and the Canadian Airport, which is the one with British Airports Authority and they withdrew, were made public, and the rest were not.

Mr. Desmarais: I believe Paxport and Canadian Airports did make theirs public at various venues, but not - they didn't make a big splash, if you like, in terms of press releases.

Senator Jessiman: But the others did not?

Senator Jessiman: Airport Development Corporation was a very private type of corporation and didn't get splashy with the press.

Senator Jessiman: We are going to talk to you gentlemen tomorrow about your talking with Mr. Nixon and your meeting and your giving of reports, but in your discussions or any paper that you saw, do you know if all that information that I've just given you about these unsolicited proposals was given to Mr. Nixon?

Mr. Desmarais: I could not say off the top of my head. I believe he asked me personally about the unsolicited proposal in September, '89, and I replied to that unsolicited proposal. I wasn't asked about any other ones.

Senator Jessiman: He didn't ask you whether there was another one?

Mr. Desmarais: No.

Senator Jessiman: So he asked if Paxport had made an unsolicited, and he didn't ask and you didn't tell him that there were others.

Mr. Desmarais: I didn't.

Senator Jessiman: Were any of the other two of you asked anything about unsolicited?

Mr. Jolliffe: I never spoke with Mr. Nixon.

Mr. Rowat: I was not asked.

Senator Jessiman: Mr. Chairman, 20 minutes. Not bad.

Senator Lynch-Staunton: How many unsolicited proposals were there?

Senator Jessiman: Five.

Senator Lynch-Staunton: Mr. Nixon says there were?

Senator Jessiman: One. Because he was only told there was one.

Senator LeBreton: Just as a supplementary to Senator Jessiman, what happens to unsolicited proposals when they come into the department? Is there a process to deal with them, or is there an unsolicited proposals desk? What happens to them?

Mr. Desmarais: Those proposals would have been send to Mr. Berigan, who was in charge of the T1T2 file at Ottawa at the time. They would have reviewed, and they were subsequently replied to. They are generally sent to the minister or the deputy minister of the day, and they would have been replied to saying, "Thanks but no thanks," in this case.

In certain instances, if there is an unsolicited proposal comes in, say for a research project, which happens quite regularly, it will be considered and could be funded in certain instances, depending on the departmental priorities.

In this instance, the department had wisely decided that unsolicited proposals wouldn't be entertained on this one.

Senator LeBreton: So I suppose in a lot of different government projects, an unsolicited proposal is not an unusual occurrence?

Mr. Desmarais: No, it isn't.

The Chairman: Before I recognize Senator Kirby, Mr. Nelligan has a question.

Mr. Nelligan: Just following up on that question, in the material we got recently, it would appear that in the preparation of the RFP that did ultimately go out, that your staff did use the material that you had received in the unsolicited proposals to examine the various factors that you might want to put into your RFP; that not correct?

Mr. Desmarais: I don't believe that's correct, but I would rather contact Mr. Power who wrote the RFP, and I believe he has stated in the past that he did not use any of the unsolicited proposals in drafting that RFP, and I stand by that statement.

Mr. Nelligan: While we have the supper interval, I'll show you the document. It just occurs to me that there is some reference to using it as a research source. We will get that over the supper hour.

Mr. Desmarais: Thank you.

The Chairman: Senator Kirby, will you call it 5:30 and then begin again as if -

Senator Kirby: I'm happy to call it 5:30, Mr. Chairman, right now.

The Chairman: Right now?

Senator Kirby: As I understand it, I thought what you were saying to me was rather that start a line of questioning with five minutes to go, would I call it 5:30. I'm happy to call it 5:30, and then we'll begin again at 7.

Senator Gigantès: I have a short one. I'm going to ask, what is the pertinence of this line of questioning, senator?

Senator Jessiman: You're asking me this?

Senator Gigantès: Yes.

Senator Jessiman: The purpose is, as I said at the outset, from reading Mr. Nixon's report, I read it as if there was - that he assumed there was only one unsolicited proposal. He was saying - and if that's the only one he knew about, the only one he asked about, that's the only information he had, he came to the conclusion, wrongly, I suggest, that they being the only ones that had an unsolicited proposal, they had a great advantage over all the others.

Well, the actual players, the actual players ended up and some that makes unsolicited proposals didn't make a proposal. Others that hadn't made a proposal. Some withdrew. But the point, there were five in total. If he'd known that, would he have come to that conclusion. I would hope not.

Senator Gigantès: Thank you for this answer.

Of those who made unsolicited proposals, how many responded to the request for proposals?

Mr. Jolliffe: There were three respondents to the request for proposals, only one of whom had made an unsolicited proposal, which was Paxport.

Senator Gigantès: So there were three respondents to the request for proposals, and only one -

Mr. Jolliffe: I think we're both saying the same thing, except that the line follows from Airports Development Corporation, who had been taken over by ATDG, so their knowledge and material from that source ended up in the ATDG proposal. So one could say that two of the unsolicited proposals actually ended up being respondents to the RFP.

Mr. Desmarais: I just wanted to clarify that the Paxport Group that submitted the unsolicited proposal in September, '89 was not the Paxport group that bid. They were a different consortium. The only group that was the same was the Matthews Group.

Senator Gigantès: Wasn't Mr. Matthews connected with Paxport?

Mr. Desmarais: Yes, both proposals, but -

Senator Gigantès: Okay. Hold on a minute. As I understand what you're saying, it is that this business of how many made unsolicited proposals is hardly very relevant because Mr. Nixon says that only one, really, of those who made proposals had made an unsolicited proposal before and therefore had had time to prepare and had a better start than the others.

Mr. Desmarais: That's an opinion of Mr. Nixon. I can't comment on it.

Senator Gigantès: You can't comment on that, but did others who submitted bids have the advantage of having made a unsolicited proposal before?

Mr. Desmarais: We believe that Airports Terminal Development Group, which was the successor of Airport Development Corporation, controlled by difficult people, had some benefit of an unsolicited proposal.

Senator Gigantès: Controlled by different people.

Mr. Desmarais: That's correct.

Senator Gigantès: So it was not the same firm.

Mr. Desmarais: That's correct. But as I just mentioned, the Paxport group submitting the unsolicited proposal and the Paxport group bidding is not necessarily controlled by the same person.

Senator Gigantès: But Mr. Matthews -

Mr. Desmarais: Is common to both, and so is Lockheed and ADC, which is Airport Development Corporation, and ATDG, which is Airport Terminal Development Group, although not the controlling shareholder.

Senator Gigantès: Thank you.

Mr. Nelligan: Mr. Jolliffe has the document I referred to.

Mr. Desmarais: Thank you. I'll have a look at it and get to you after supper.

Mr. Nelligan: Look at it over the supper hour.

The Chairman: We'll adjourn until 7 o'clock.

The committee adjourned until 7:00 p.m.

---

Ottawa, Tuesday, August 15, 1995

The Special Senate Committee on the Pearson Airport Agreements met this day, at 7:00 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: Order, please.

Just a couple of quick announcements. I would like to advise the committee that we will meet at 9 a.m. from now on. Wherever it says 9:30 in the morning, like Wednesdays and Thursdays, please read it as 9:00. I think we agreed on that.

Senator Kirby: That's fine.

The Chairman: That's the first point.

Secondly, perhaps senators could respect the microphones and move as closely as possible to the microphones when you are speaking, because the court reporters have difficulty.

I apologize if I showed some impatience with regard to the interjections of senators, except that the court reporters can't get it. So if you could just raise your hand quickly, I will try to arrange a supplementary, but don't have the debate between senators. We have witnesses here who can answer questions. So let's try to do it that way. That is just to keep things flowing a little bit more smoothly.

Now, when we adjourned for supper, Senator Kirby was about to start an examination of the witnesses. The 30-minute time frame for the first round is now in force. So away you go, Michael.

Senator Kirby: Thank you, Mr. Chairman. We get more than one round, so we're okay.

I wonder if I can just clear up a couple of things - I was about to say this morning, but I guess it was this afternoon - and then I want to move on to some specific issues.

First, Mr. Rowat, I want to make sure I understood correctly your comments on the statement that due process had been handled each step of the way or roughly like that. Your definition of "due process" was, as I recall, that ministers had approved each step of the process as you went through it. Am I correct that that was your definition of "due process"?

Mr. William Rowat, Deputy Minister, Fisheries and Oceans Canada: At various important junctures.

Senator Kirby: Right. Therefore your definition of "due process" is essentially that the appropriate political approval was given at each step and is not really a comment on the process itself. It's a comment on the fact that at each step, it was politically agreed to; is that correct? Like, you're not giving an abstract assessment of the process. What you're saying is that each step of the process, politicians agreed to it. That, by definition, makes it due process.

Mr. Rowat: No. Perhaps let me phrase it a different way.

From my perspective and certainly during my regime on this file, "due process" means that ministers give direction on specific items and officials take those directions. Where a minister feels that for whatever appropriate reasons he needs broader direction from his colleagues, because it crosses the lines into someone else's bailiwick financially, or if there's a certain politically or regionally sensitive issue that needs to be dealt with in a broader forum, then it is due process that he seeks the concurrence of ministers on the particular issues.

Senator Kirby: Right, and as long as ministers give direction, that constitutes due process. That's not an assessment on your part as to whether that direction is the right direction.

Mr. Rowat: That's right.

Senator Kirby: I wanted to make that clear.

Mr. Rowat: Exactly.

Senator Kirby: The second point, just to clarify because I'm puzzled a bit, is that I understood exactly what you said at to why there was no termination clause, and yet I'm puzzled because if I read the evidence that Mr. Hession gave before the House committee - here I'm referring to House of Commons Transport Committee hearings on Bill C-22, issue number 7, page 7:19 in the bottom left-hand corner. I'll just read it.

I'm sorry. I didn't have time to get this photocopied, but I'm happy to give it to the members opposite. I just want to read you two statements from Mr. Hession, who as you remember was a former Deputy Minister of Public Works.

Mr. Chairman, the normal practice to this day by the contracting authority of the Government of Canada is to include in its contracts clauses to do with termination for convenience wherein the Crown, for whatever reason, decides it doesn't wish to proceed with a contract.

Then he goes on to say:

...in normal times and normal contracts there would be a termination for provision -

I guess you made it sound, as I understood what you said this afternoon, that a termination provision was not normal in the case of a lease. Yet when you read Mr. Hession's comments, it seems that from his comments, at least, he was not referring to this contract. He was referring to his days as the Deputy Minister of Public Works.

The Chairman: Supply and Services.

Senator Kirby: Supply and Services. I'm sorry, Mr. Chairman. A termination clause was a normal thing to be included in any contract. I wonder if you could explain to us why the two of you seem to differ on that particular point?

Mr. Rowat: What I can say is that the advice that we have or had at the time was that under leasing arrangements because of special circumstances with respect to the lessor and mortgagors, that it was not normal circumstances for the leasing of property.

I suspect what Mr. Hession was referring to was standard government contracts for goods and services. Beyond that, I would probably have to rely on expert advice from Treasury Board or somewhere else. John might have a fuller answer.

Mr. John Desmarais, Senior Advisor to the Assistant Deputy Minister, Airports Group: Just listening to his description there, he uses "contracts" and "contracting authority". Contracting authority and lease authority are two different things in the government. Leasing is governed by the Bureau of Real Property Management, whereas major procurement is usually governed by the Department of Supply and Services. It's major procurement contracts that normally have the cancellation provisions, cancellation for convenience, not the lease provisions, which are done under the Bureau of Real Property Management.

Senator Kirby: Yet, Mr. Rowat, when we had the discussion last week about the written orders you had requested before signing the contract some 18-odd days before the election, why did you request those written orders? I want to get back to this in the context of the termination clause, but why did you request those written orders or in fact to whom did you request those written orders?

Mr. Rowat: Is this tied to your previous question?

Senator Kirby: It will be in a minute, because I want to come back on the termination clause question. First, did you in fact request Ms Bourgon to give you an explicit written order?

Mr. Rowat: Yes. As I testified at the earlier occasion, I did speak to Ms Bourgon and requested some explicit direction.

Senator Kirby: In writing, obviously.

Mr. Rowat: Pardon?

Senator Kirby: You obviously asked for it in writing.

Mr. Rowat: Yes. I indicated that I would prefer it in writing.

I think, as I indicated earlier, it was a sensitive situation. It was, as you say, during an election, number one; number two, the file had become extremely contentious during that particular period. As I recall, I was just coming off a vacation and had only realized how contentious it had become in those early days in October.

Senator Kirby: So you asked her to give you explicit direction.

Mr. Rowat: Yes. I asked her - I told her what I considered to be a very sensitive situation, and she felt, and I concurred with her, that it was a circumstance where we should seek some very explicit direction. She subsequently spoke to Glen Shortliffe, who was then Clerk of the Privy Council, and concluded that - I'm assuming. You will have to talk to her about that.

Senator Kirby: That's right. Then given your comment that, as I think you said, it had become a controversial issue - "sensitive", I guess, was the word you used a minute ago - did you give no consideration at that point in time to introducing a termination clause of some kind since it would appear that there was at least some doubt as to what would happen to the contract after the election?

Mr. Rowat: No. No, I didn't.

Senator Kirby: It was never discussed?

Mr. Rowat: No.

Senator Kirby: You never discussed it at any meeting with any officials at all?

Mr. Rowat: During that period?

Senator Kirby: Yeah, or during the period of, let's say, the three weeks leading up to the signing or something like that?

Mr. Rowat: No. At that point, it hadn't become that contentious a file, but by late September or early October, it had clearly become a very contentious file.

Senator Kirby: Before you'd signed it?

Mr. Rowat: Before - yes - okay, let me back up.

You will recall in my opening statement I indicated that on Sunday, the 3rd, the arrangement had been signed by Mergeco or Pearson Development Corporation at that point. The following day on the 4th, on Monday, the 4th, it had been signed by Minister Corbeil, and then the documents were put into escrow so that what I was doing on the 7th was releasing the documents.

Senator Kirby: Why were they put into escrow?

Mr. Rowat: Because certain conditions precedent had to be confirmed. Like, had they actually - did they have the $61 million available? Had it been banked? And so on. So it was up to the lawyers and to us to confirm that those conditions precedent had been met before the actual release of the documents.

Senator Kirby: So, in fact, the original signing some four days before or three days before had not involved you. It had been signed by Minister Corbeil; is that right?

Mr. Rowat: Exactly.

Senator Kirby: Can I ask you some questions about the creation of Mergeco? I understand somebody asked you earlier today whether or not you were the official that Mr. Hession referred to. Obviously you weren't because, one, you said you weren't, and two, and you weren't in Transport at the time in any event. That question was asked to all three of you; am I correct?

Mr. Desmarais: Correct.

Senator Kirby: But you were in the PCO on the file. When did you first hear about Mergeco, or at least the suggestion being that the two bidders ought to get together or were considering getting together or however you want to phrase it?

Mr. Rowat: I had a discussion with Ran Quail in late January on the file, as I would do every once in a while.

Senator Kirby: For the record, Ran Quail at that time was still Associate Deputy Minister of Finance; is that correct?

Mr. Rowat: Associate Deputy Minister of Transport.

Senator Kirby: Transport. I'm sorry.

Mr. Rowat: And he was the chief negotiator on the file at that point.

Senator Kirby: Right.

Mr. Rowat: So as a general practice, I and the staff officer I had working for me would stay in touch with him regularly. During late January, in a call to him, he informed me that the two had actually pulled together and were proposing to put together a proposal.

Senator Kirby: So if this was late January - because according to Mr. Hession, the phone call to him to suggest that the two sides should get together was some three or four days after the announcement in mid-December. So this was a month later or six weeks later.

Mr. Rowat: Exactly.

Senator Kirby: And you didn't know that this was happening up until then?

Mr. Rowat: No.

Senator Kirby: Hadn't been at any discussions where this was taking place?

Mr. Rowat: No.

Senator Kirby: As a senior public servant, had you been in the Department of Transport - I understand you weren't - would it have occurred to you as an experienced senior official that maybe the solution, two or three days after the best overall available proposal has been announced, was to phone the proponents and suggest that the two of them team up? Does that strike you as a normal practice that a senior official would make that phone call?

Mr. Rowat: I don't know what the circumstances were at the time, so I really can't comment. I don't know who the senior official was.

Senator Kirby: No, I don't know who the senior official was either.

Can you conceive of a circumstance in which you would have made that phone call had you been a senior official in Transport, I mean assuming you would not have been ordered to do so by somebody?

Mr. Rowat: Well, it is a bit of a hypothetical question to me, so - no, I don't think at this moment I can really respond to what those circumstances would be.

Senator Kirby: Okay.

Mr. Jolliffe, when did you first become aware that the two sides were going to get together?

Mr. Keith Jolliffe, Financial Advisor, Air Navigation System Commercialization Project, Aviation Group: I was made aware by Mr. Ran Quail - I think it was on January 18, but it was around that time - of a meeting at eight o'clock in the morning somewhere in Ottawa. I got a debriefing from that meeting, and I made notes to the file to that effect. We had also received a document which explained the Mergeco proposal.

Senator Kirby: You got the document from whom?

Mr. Jolliffe: From Mr. Quail, a document which explained the Mergeco situation as it was at that time, which was embryonic, for us to look through. It was held under very tight confidence on a very strict need-to-know basis.

The Chairman: Senator Kirby, would you permit a supplementary?

Senator Kirby: Absolutely.

Senator Lynch-Staunton: Just to get back to the October 7th date, may I be allowed to ask Mr. Rowat who determined that date?

Senator Kirby: Sorry. October the 7th was on the date on which -

Senator Lynch-Staunton: October 7th, yeah. You were asking questions about it.

Senator Kirby: I hadn't mentioned the precise date.

Go ahead.

Senator Lynch-Staunton: Who determined that date? I mean, was it just pulled out of thin air? How did it come about? Why October 7?

Mr. Rowat: In August, and in fact it may have been early August, we realized between all parties that we would not have all of the legal documentation completed and that our best estimate at that point was the end of September was the earliest that the formal documentation could all be completed. When you worked with a calendar, it ended up that that weekend of October 3 - as I said, that was a Sunday. Friday was the 1st, I guess. So in other words, we basically met the target that we, as officials for all parties, had advised that was the best that we could do in terms of getting all of the documentation completed. That's why when the agreement was announced, it was announced as an agreement in principle on August 30. At that point, ministers made clear in the announcement that in fact there was legal documentation to be cleaned up, but for all intents and purposes, they announced the agreement had been struck.

Senator Lynch-Staunton: In effect, wasn't the agreement reached in July and Treasury Board and Order in Council and all those formal approvals were made in August?

Mr. Rowat: Most of the larger components were agreed during July and the early part of August, but for both sides and certainly for Air Canada, until everybody had consulted all of their parties and got formal approvals, it was all ad referendum.

Senator Lynch-Staunton: But what did Treasury Board and the Privy Council do at the end of August? What was the significance of their approvals of the agreements?

Mr. Rowat: At the end of -

Senator Lynch-Staunton: I think on August 27th - I don't have the date in front of me - the government, Treasury Board and the Privy Council all agreed to confirm, if not ratify, these contracts as being binding agreements on the Government of Canada.

Mr. Rowat: We needed an Order in Council.

Senator Lynch-Staunton: Which you got.

Mr. Rowat: Which we got and which was presented as evidence -

Senator Lynch-Staunton: At the end of August.

Senator LeBreton: August 27th.

Senator Lynch-Staunton: Now is that Order in Council binding on the government?

Mr. Rowat: It gives the minister authority. I think if we read the record on it, it gives the minister authority to sign the ground lease and, I think, the management services agreement, and I've forgotten what else.

Mr. Desmarais: Bill of sale.

Mr. Rowat: And the bill of sale.

Senator Lynch-Staunton: So what happened between - I guess I'm going into your time. I'm sorry.

Senator Kirby: He'll give it back to me. He's a very generous chairman.

Go ahead.

Senator Lynch-Staunton: What happened, then, between the end of August and October 7th in terms of these contracts? Were there negotiations as such? Were there major changes made? Were there alterations?

Mr. Rowat: There were continuing negotiations on a number of fronts. The deal was by no means completely concluded at that point. The question was whether there were any material changes beyond that point.

At the end of August, August 30th, the minister at that point had the approvals that he required, both the Order in Council and other authorities to proceed to conclude the deal so long as there weren't I guess what you would interpret as material changes. From the officials' perspective in going over that, there were no material changes.

Senator Lynch-Staunton: So is it fair to say that between the end of August and the 7th of October, it was more housekeeping and cleaning up rather than any significant changes to the agreement?

Mr. Rowat: It was more than housekeeping. There were a lot of very significant elements to be negotiated, but we essentially knew what the terms -

Senator Lynch-Staunton: So within the guidelines that were given?

Mr. Rowat: Within the guidelines.

Mr. Desmarais: During September, we finalized the development agreement and the management and operations agreement, which were two of the major agreements.

There was a term sheet approved by Treasury Board for those, and we didn't deviate from that, but it was to get the legal wording in place and so on and finalize those agreements. Those were quite substantial blocks of work to complete through September.

Senator LeBreton: Just to clarify on his question, the October 7th date was then a date not set by the government or the political side of government, per say, but the parties to the agreement, as the date to when you would have all of the documentation?

Mr. Rowat: To have the final legal documents concluded was end of September, early October, was our estimate, which is when it was completed.

Senator Lynch-Staunton: And the nervousness - this is my final question, Senator Kirby, and I thank you for your patience - about the signing, about meeting that date was initiated at the level of senior civil servants. There was no pressure from Ms Campbell or from Minister Corbeil or from anybody on the political side to make sure that the signature was put on the contracts?

Mr. Rowat: That is correct.

Senator Lynch-Staunton: And Ms Campbell, we can say, and her cabinet never interfered in the process after Treasury Board approval on the 27th of August?

Mr. Rowat: That is correct.

On your earlier point, the request came from myself and the deputy minister at the time for direction. It was -

Senator Lynch-Staunton: She was informed by Mrs. Bourgon and Mr. Shortliffe that there was a commitment made by the government to have a signature apposed at a certain time, and they wanted confirmation that this obligation would be honoured.

Mr. Rowat: Yes, whether I should proceed to release the documents from escrow.

Senator Gigantès: Mrs. Bourgon was Deputy Minister of Transport at that time?

Mr. Rowat: Yes. She was Deputy Minister of Transport at the time. Glen Shortliffe was Clerk of the Privy Council, and I was Associate Deputy Minister of Transport.

Senator Lynch-Staunton: Actually, what happened on the 7th of October? Was it a signature, or was it a release of the documents? What happened on the 7th of October?

Mr. Rowat: In terms of the actual documents themselves?

Senator Lynch-Staunton: Yes.

Mr. Rowat: As I remember, it was a formal release from escrow plus numerous other documents in terms of whether certain conditions precedent had been met. Was the $61 million -

Senator Lynch-Staunton: I have to be careful here. I said there were no signatures apposed. There was a release of documents rather than another signature.

Mr. Rowat: I think that's correct for the most part.

Mr. Desmarais: Mr. Rowat signed a release from escrow document.

Senator Kirby: He must have signed something because he had exclusive orders that it was okay to sign.

Mr. Rowat: Well, it was the release from escrow, but I'm not sure -

Mr. Desmarais: And there were several other minor documents.

Senator Lynch-Staunton: Well, we will get back to this another time. I just wanted to clarify this.

Senator Kirby: Can I get back to the origins of Mergeco for a second?

Once the two bidders had started to form Mergeco or were in the process of forming Mergeco, once you knew this at the end of January, you said, as I understood you this morning, you continued to negotiate around the Paxport proposal, number one, but, number two, that the Claridge or the ATDG proposal was still on the table.

Mr. Desmarais: That's correct. Yes.

Senator Kirby: Kind of help me a bit. How do you do this? You've got two people bidding. Two of them then decide to get together, and one of the two doesn't withdraw their bid. I realize you said ultimately well down the road sometime in May they withdrew their bid. What was the significance of the Claridge proposal still being left on the table?

Mr. Desmarais: I'm not sure I can answer that. They left it on the table. They had entered into a binding agreement. I think it became binding early in February. There was a January 14th letter of intent, if you like, that became binding early in February. We were still looking at the financeability issue. The financeability issue wasn't resolved, as I think we pointed out the other day, until mid-March. Then we had set a stipulation that if they didn't withdraw their proposal, we couldn't get on with serious negotiations.

Senator Kirby: Why? I mean if you went from February to May, presumably you were negotiating. Why did you insist that it be pulled off the table?

Mr. Desmarais: Because you can't negotiate with one party that represents two sides.

Senator Kirby: But you had been doing it for three months.

Mr. Desmarais: No, we hadn't been negotiating, sir. We had been proving the financeability of Paxport and had set up the tables to commence negotiation, but formal negotiation didn't commence 'til May 5th.

Senator Kirby: And that's why you insisted that it come off the table. You had been looking, though, at the financeability question initially of Paxport alone, not Mergeco.

Mr. Desmarais: We started with Paxport alone, yes.

Senator Kirby: And we'll come to that because we have the Deloitte Touche report down the road, but when the initial Deloitte Touche report said that Paxport alone did not meet the financeability test, then you proceeded to look at the financeability test related to Mergeco itself.

Mr. Desmarais: I'm not sure that was the process. I think we had started with Paxport, and then towards the end of January we met with Richardson Greenshields in Toronto and got a presentation on the Paxport proposal. Then, at that point, when the letter of intent became binding, we started to factor in Mergeco rather than just Paxport alone at that point. There was other issues then to look at.

Senator Kirby: Explain that to me again, Mr. Desmarais. You mean it was sort of a slow transition process. It wasn't sort of you stopped considering one, and you considered the combined the next day?

Mr. Desmarais: No, we didn't do that.

Mr. Jolliffe: The reference to Richardson Greenshields is not correct. We actually had a presentation by Wood Gundy on the Paxport proposal from the point of view of their impressions of the financeability question.

Mergeco emerged in that January period, and they, as a group, had a number of issues to deal with. The documents they provided to us -

Senator Kirby: Between themselves?

Mr. Jolliffe: Between themselves. For example, Lockheed had, as part of the ATDG proposal, to be brought on side with the Mergeco philosophy or the intent that Mergeco was intending to deal with. I think that took them some time, and there was several documents that they went through within themselves. A certain amount of time was available for this Mergeco process to be handled between the parties. They had determined if they couldn't deal with it by that point in time, that intent would dissolve, and we presumably at that time would have been back to struggling through that earlier process of the financeability question. There's other concerns that were there with Paxport before we dealt with it on a true negotiations basis.

Senator Kirby: What did Paxport bring to the table once the money and the deep pockets - that phrase has been kicked around at this committee - from Claridge were in? I mean why did you need Paxport at all at that point?

I'm not sure who I'm asking the question to because I'm not sure who was dealing with them, but I see you're all looking at Mr. Desmarais. That's the difficulty of being at one end of the panel.

Mr. Desmarais: That's a hypothetical question, but to answer it very simply, we wanted their proposal.

Senator Kirby: I beg your pardon?

Mr. Desmarais: We wanted their proposal. We wanted their building. We wanted their money, their rent.

Senator Kirby: And you could not have gotten that proposal -

Mr. Desmarais: Through ATDG.

Senator Kirby: Why do you say you couldn't have gotten that proposal? You can get to anywhere once you start a set of negotiations. What you're saying is you started out here and ended up here. You could have started out here and ended up there also, right?

Mr. Desmarais: They had a very specific proposal on the table.

Senator Kirby: They both did.

Mr. Desmarais: But for the building, for example, and how they were going to handle that design and construction program and what it was going to do for you eventually. We liked Paxport's better. They scored much higher in that process, and so on. We wanted that proposal of Paxport to negotiate from.

Senator Kirby: So what you are saying is you wanted some of the - let me call them the physical rather than the monetary - physical characteristics of the Paxport proposal, and you wanted some of the monetary characteristics of the other one.

Mr. Desmarais: I would say we liked the deep pockets of Bronfman, but we didn't necessarily go to the financial offer that the Bronfmans had made. We stayed with Paxport.

Senator Kirby: Could you have gotten to exactly the same point, do you think, had you started out with Claridge and simply negotiated around that? It's obviously speculation, but I'm just trying to get some sense of what you're -

Mr. Rowat: It is speculation, and you would have been negotiating up instead of down from what the initial offer had been on the table.

Senator Kirby: But I mean up and down depends on where you sit, right? I mean if one side is coming down, the other side is going up. I'm not sure that up and down is really a definition of what you're doing.

Mr. Jolliffe?

Mr. Jolliffe: Yes, senator. I think the issue that's really at the centre of this is the actual building proposal they were putting forward. ATDG obviously had the advantage of having T3 as part of it, but to move from that development proposal upwards was a much more difficult concept to handle than to take a development concept that had been evaluated and found to be significantly superior to the ATDG proposal. So we wouldn't have wanted to lose that operational benefit, which was really the issue of keeping the airport running and providing the organization. I think that's John's point.

Senator Kirby: Since you've raised the question of sort of negotiating up or down and ending up at a different place than you started, which is the negotiation of any negotiation, can I ask you some questions specifically about where you ended up versus where you began? I'm asking you because some of you maybe were here when we tried to get Mr. Broadbent into a discussion of a couple of these and he referred us to you people. I'm not sure who the appropriate person is, but let's just begin with the issues that we had with Mr. Broadbent.

Number one, with respect to the threshold guarantee - which again, just for the record, was the guarantee that said up until a certain level of passengers, the government could not take action which would divert passengers to some other airport in the neighbourhood - you ultimately wound up with a $33 million figure; is that correct?

Mr. Rowat: 33 million passengers.

Senator Kirby: I'm sorry, the 33 million passenger figure. Am I right?

Mr. Rowat: Yes.

Senator Kirby: In the course of negotiations, a whole variety of numbers were bandied about. I think at one point there is a document in which Paxport - let's call it Mergeco. Mergeco was asking for 39 million, and then there was a 35 million passenger -

Mr. Rowat: That's correct.

Senator Kirby: What's your reaction to the comments - I guess I'm really referring here to Mr. Rowat's black book, which by the way - I'm sorry. I've duplicated every other document I'm going to use, but this one has 100-odd pages in it. The number is 00302. In annex (d) of that document, which is the annex that deals with "Diversion Threshold/Capacity Guarantee", the statement appears - and I think this is exactly the quote I used before. It was in a different document before, but the same papers appeared to us before.

The statement in the document says as follows:

A threshold guarantee is, in effect, a guarantee of freedom from competition and removes the incentive to maintain good service to retain tenants.

Can you tell us little bit about what your reaction to that is, how you arrived at the passenger guarantee, and how you arrived at a situation in which, from the point of view of passengers, the passengers could conceivably be left in a situation in which the airport had become substantially overcrowded prior to the government being allowed to divert traffic to any other airport?

Mr. Rowat: Perhaps I can start the answer on that one and the others can join in.

Prior to my taking over the file, Mr. Broadbent had had a set of negotiations, as you referred to, starting on the other side at 39 and dropping to 35 with their express intention of achieving a number that was financeable. I think the advice on the Transport Canada side was that a more realistic number in terms of the project would probably be in the range of 30 to 32 million.

Senator Kirby: Correct. That was exactly the number that was quoted in documents that were tabled when Mr. Broadbent was here.

Mr. Rowat: Okay.

I think obviously there's a degree of risk when those kinds of numbers are negotiated. I think, as I recall, being in PCO at the time, Mr. Broadbent raised this whole concern as to whether the number should be higher, around 35, or whether it should be at 30, 32. In presenting his arguments, I think that the overall conclusion was that 33 was a number that had a certain degree of risk with it, but -

Senator Kirby: Risk to whom?

Mr. Rowat: That there may indeed be some congestion and that the government may indeed have to exercise the compensation clause; but, it was the government's decision that that was a degree of risk that they would be prepared to take under these circumstances.

Senator Kirby: Do you agree that the RFP did not contain a clause related in any way, shame or form to a passenger diversion guarantee?

Mr. Desmarais: That's correct.

Senator Kirby: So to that extent, this is something on which the government gave up something in the course of getting a solution. I mean it gave away something that was not in the RFP and which had not been on the table and was not actually contained in the response to the proposal.

Mr. Desmarais: It was contained in the response to the proposal.

Senator Kirby: I'm sorry. It was not in the RFP; it was in the response.

Mr. Desmarais: It was in the response by Paxport that they wanted a 39 million passenger -

Senator Kirby: That's where the 39 came from.

So this was something, in a sense, that the government gave in on in the course of - understanding that in any negotiation you give and lose, you win some and lose some, but this is something that in a sense we gave up in the course of negotiation; is that right?

Mr. Desmarais: We, if you like, gave up in the sense that it wasn't in the RFP. There were many conditions attached to the 33 million, as you realize, senator, if you've read the agreement, that the 33 million is really 30.5 because we had the right to move 1.5 million passengers at any time - sorry, 31.5, and that's in the 30 to 32 range so we could maintain that range. Then there were ups and downs on it.

The other thing is we could trade the compensation for Area 4 at the airport, and there would be no compensation then and no guarantees about what they could do with Area 4 and any other area.

The other point there is that the government had decided in '89 that they were going to optimize Pearson, and this development was the first step to that. The ultimate capacity of Pearson with the six runways was envisioned to be about 50 million passengers.

Senator Kirby: Okay. Tell me about the rent deferral, where that came from and what it consisted of because it's another issue that we tried to get into a discussion with Mr. Broadbent on, and he carefully punted it to you people.

Mr. Rowat: Again, this was before I took over the file at Transport Canada, but I guess the issue during negotiations, when Mr. Broadbent started the negotiations, was to what extent can the airlines afford to pay the kind of fees that were envisaged for that period of 1994 through 1997? It was made very clear, as I understand it, during the discussions between Mergeco and Air Canada that that was going to be an extraordinarily difficult prospect for Air Canada and in fact other airlines to handle just because of the financial circumstances of the airlines at that point in time.

Various proposals were discussed for a way to get around this problem of the high figures in those initial years, as I recall from what I was briefed on at the time. Some proposals were made by Mergeco that perhaps they could forego an increased rent from the airlines at that point if the government would allow I think it was a $1 PFC, personal facilitation charge.

Senator Kirby: Passenger facilitation charge.

Mr. Rowat: Passenger facilitation charge.

Another proposal came up, I think during the discussions, that they might be prepared to consider deferring the rent, paying it back, but over the whole 55-year period - deferring the rent for the first 3 years and then paying it back over 53.

So there were those kinds of proposals, I think, on the table. So that was the kind of discussion. The question was, do you force the airlines to the wall to pay an increased fee during those early years? Was it possible, given that Air Canada in fact had a lease that was good until 1997? And if you couldn't and it was still desirable to proceed with the project, then was the government prepared to consider some sort of measure for rent deferral?

Senator Kirby: But Mr. Rowat, as I listen to you, what you are saying is that whatever the cost was of getting started, this cost was either going to be paid by the airlines or by the government. What were the developers contributing in that sense? It seems to me that the whole strategy here was the money is going to be laid off on somebody other than the developers. The dialogue you just - the options you just laid out were a tradeoff between the government paying it by way of foregone rent which would be collected down the road and thereby the government making, effectively, an initial upfront contribution to the project or the airlines paying it. Why was the issue not on the table of what was the developer going to contribute?

Mr. Rowat: Well, I think as you recall, the developer was putting upfront money into the project.

Senator Kirby: A relatively small amount, but okay.

Go ahead.

Senator LeBreton: What's a relatively small amount?

Senator Kirby: I will take that back because the other side will argue about my judgment.

Go ahead.

Mr. Rowat: So I think they were clearly putting in upfront money to get the thing kicked off early. There was a question, as I think we discussed last time, whether that amount should be 47 million or whether it should be 96 million. The government insisted that it should be a $96 million investment.

Senator Kirby: Do you remember what the number was for Claridge in their upfront offer, in their proposal?

Mr. Rowat: I don't recall.

Mr. Desmarais: I think it was around 150.

The Chairman: Senator Kirby, I've given you 39 minutes because you were interrupted, so do you think you can wind up this first round?

Senator Kirby: Can I just finish on this one, and then you can put me down for a second round?

So what you are saying is that the numbers were 47, roughly, from Paxport, and 96 is what you wanted. Claridge had come in substantially beyond that, and yet your view was - am I right on that?

Mr. Desmarais: I'm just going to go back to the proposal stage.

Paxport made an early start proposal that envisioned a little over $100 million in upfront investment, and that was just to take care of Air Canada's urgent problems.

Senator Kirby: On the assumption that Air Canada would also -

Mr. Desmarais: Would sign the lease and do all of these wonderful things and that there was no other guarantees for any further construction beyond that point, and they were going to get all of the revenues from the site in the meantime. So that was one that was thrown off the table relatively quickly.

Senator Kirby: It was thrown off the table relatively quickly because Air Canada couldn't pay the increase.

Mr. Desmarais: Well, because the government wouldn't accept it either because that would mean giving up the lease for "X" years and not getting any guarantees of construction.

Senator Kirby: Right.

Mr. Desmarais: So we then asked for other quickstart proposals, we got a 47 and 96, and 96 was somehow - either through a passenger facility charge, or the government deferring rent, or a 47 that they would fund themselves, the government wanted to start construction relatively quickly to make jobs, and they did some balancing and tradeoff of their own.

Senator Kirby: Mr. Chairman, I will stop there because that gets into the issue of the passenger facility charge. I'm happy to leave that and come back to it on the next round.

The Chairman: Now who had their hand up here?

Senator LeBreton: Well, I mean, you know, I can -

Senator Jessiman: I've got lots of questions.

Senator LeBreton: We're both ready.

The Chairman: All right. Senator LeBreton.

Senator LeBreton: I will go back to my favourite subject, which is the state of terminals T1T2.

My first question goes back to the testimony that we've had on the need for the redevelopment of Terminals 1 and 2. Mr. Shortliffe and others, of course, testified about the state of disrepair on T1T2, including the parking garages. To quote Mr. Shortliffe in his testimony, he said the situation at Pearson was the result of 15 years of benign neglect. To further quote him, he said that Pearson was a mess. It was a disgrace and, worst of all, it was not working.

The terminals at Pearson were a big part of the problem. As well, Terminal 1 by 1988 and 1989 he best characterized as a slum.

He went on to describe the conditions of the parking garage, the outdated technology, and Terminal 2 was at a stage where it was suffering from an inadequacy of gates.

Do you agree with Mr. Shortliffe's assessment of this? Was this in fact the state in the late 1980s? Was there a great urgency to modernize the terminals, particularly with respect to safety and health aspects?

Mr. Desmarais: I think we would agree with Mr. Shortliffe's characterization in 1988. We may not agree with it in 1990 when Terminal 3 opened. We were running over capacity in the two terminals, especially Terminal 1. It was running at roughly 10 million passengers a year in late '88 and early '89. It had a design capacity of roughly 5 million people, so it was well overdue for some work. We had to move some people. Terminal 3 was going to solve that problem.

In the department at that point, there was a split opinion as to whether you needed to redevelop the terminals or wait for a master plan to be developed for the airport to see where that airport was going and to do a quick fix on Terminal 1 especially because it was tired. It had processed too many people for too long.

So, yes, in late '88 it was a mess. In early '91, I guess, from - I'm trying to remember my years and I'm getting them all confused through this process. When Terminal 3 opened, it alleviated a lot of the problem.

Yes, there were some problems with the fire alarm systems and so on, according to the newest codes that were on the street. It was built and designed in the seventies to the existing codes at the time and met all those codes.

Those problems have been recognized. They were recognized during the proposal process, and there's work under way right now to correct those. In fact, I think the fire alarm systems and so on have been corrected at this stage.

We were obviously looking as a department at the time at a lack of funds to do everything across the country to the 160 some odd airports we were running that were all getting tired and having their budgets cut. So there was a lot of tradeoffs going on. The most urgent safety projects across the country were being funded, and not necessarily Pearson's aesthetics or levels of service. So that's the state we were in at that point.

Senator LeBreton: So it's correct to say, then, that there was a lot of urgency when this started.

We've been told that there is a serious need for improvement in the overcrowded trans-border area and to a lesser degree the international area of Terminal 2. Could you elaborate on this?

Mr. Desmarais: There's a problem in the trans-border area in Terminal 2. It's short of capacity to service Air Canada's needs. There's no shortage in Terminal 1 or in Terminal 3 at the present time.

I think the design capacity of all these terminals and their trans-border areas is around 7 million, and we are processing roughly 6.5 million people a day. It's getting close to the line where we start seeing some congestion, but it's only in Terminal 2 that we have the real problem to satisfy Air Canada's needs. International areas all have capacity, and so do domestic areas.

Senator LeBreton: Will Open Skies change this?

Mr. Desmarais: Open Skies may change it. I don't want to comment right now on the current passenger forecast for other obvious reasons. Open Skies may exacerbate the problem, but they may lessen it, as well as flights start going now from, say, Chicago to Ottawa, rather than you don't have to fly to Toronto any more to go to Chicago and so on. So that's still an open question.

Senator LeBreton: There was a reference in the testimony to the Mod Q or Gate 80. What is the situation at that particular gate?

Mr. Desmarais: Mod Q and gate 80 are different areas. Mod Q is a new international area built off the east end of Terminal 2. I'm going to confuse north, south, east and west. I think it's the south end, actually, of Terminal 2.

Senator Kirby: The terminal runs north and south.

Mr. Desmarais: It's the south end. That was built basically at that time of WardAir, and it was going to accommodate WardAir and was subsequently taken over by Air Canada.

Gate 80 was a separate facility built at a time I guess in the late seventies, early eighties. It was built by Air Canada, and the agreement signed with Air Canada at that time said that we would buy that back at market value if we ever wanted it. So the building itself was not covered by a lease agreement. It was wholly owned by Air Canada. That was the first area of construction to be undertaken in either proposal we got, ATDG's or Paxport's. So it was a problem area.

Senator LeBreton: With respect to Mod Q, are you presently operating on a temporary certificate?

Mr. Desmarais: On Mod Q, on the air side, there are some congestion problems. The certification in there the last, oh, three or four years has been temporary, looking for some solution to the taxiing problem and the parking problem in that area. I will say to you now that the Paxport proposal, as accepted, did not solve that problem.

Senator LeBreton: There has been the suggestion that the passenger decline during the recession - and we have heard this many times in the early nineties - eased the pressure on T1T2, and therefore the situation is not urgent. I made the comment - as you know, we see this often in government. When the heat is off, it gets put on the backburner. Then when the heat is on again, it creates a problem for all concerned. So I'd like to have your opinion as to the method of planning for airplane renewal, and does it make sense to derail a policy if there's a downturn in the economy?

Mr. Desmarais: It doesn't necessarily make sense to derail a policy. It might make sense to delay it and delay implementation sometimes if you are a government because of funding considerations and so on.

In terms of whether Terminal 1 or the airport is adequate in terms of capacity and the urgency of it, it does become an urgent problem as we get closer and closer to the turn of the century. As passengers grow - and we've had a downturn, and it looks like we've now had a turn to the downturn, if you like. Passengers have started to grow again, and by the turn of the century, we will still have some terminal problems at Pearson. Now the problem with that is that you need -

Senator Gigantès: Can someone explain the term "turn to the downturn"?

Mr. Desmarais: Excuse me, senator. The downturn is now turned up.

Senator Gigantès: I see. Okay. Because it could turn sideways or further down. Thank you.

Mr. Desmarais: Sorry. In the sense of looking at those facilities, the proposal we were looking at, at any terminal development or reconstruction and so on, will take about eight years. By the end of that eight years, you will be looking at capacity limitations, even with a new set of terminals.

Mr. Rowat: You have to take Terminal 1 out of commission.

Mr. Desmarais: The other point we were going to make here is that you have to take Terminal 1 out of commission at some stage to do anything economically viable with those terminals. Once you lose that terminal, which would be roughly four to six years into a construction program, at that point we would probably be into severe congestion problems because we are now four years later than when this proposal was first submitted.

Senator LeBreton: What's the passenger capacity now of Terminal 1, just roughly?

Mr. Desmarais: I will give you a fairly rough number if I can find it here. The capacity of Terminal 1 is 6.5 million people.

Senator LeBreton: And Terminal 2?

Mr. Desmarais: Terminal 2 is 11.5, and Terminal 3 is 10.

Senator LeBreton: What can Terminal 2 - if you take the 6 million out of Terminal 1 and put it over to Terminal 2, does it reach capacity then?

Mr. Desmarais: Terminal 2 is currently processing 9.7 million people right now.

Senator LeBreton: And what's their capacity?

Mr. Desmarais: That's actually a 1994 total, and their capacity is 11.5.

Senator LeBreton: So they are getting pretty close.

Mr. Desmarais: They are getting close. Terminal 3 is processing about 6.7, 6.8, and their capacity is 10. So a couple of years from now, who knows. But you take the 4.5 million people you are processing in Terminal 1 currently and try to distribute them, and you start running into congestion problems.

Senator LeBreton: So you are getting up to the top of the capacity of both terminals.

Going to the contracts, what exactly were the contracts in question for? Mr. Power made it clear that the major focus of the Request for Proposal was modernization of the terminals and not increased capacity. I think his words were that the increased capacity would have been a byproduct. Is that the case? I mean we're still talking about fixing the terminals. We weren't necessarily talking about increasing the capacity of those terminals.

Mr. Desmarais: That's correct. The problem is the piece of land they are on. With all the constraints you have to build in for air site operations and roads and so on, it was our belief that you couldn't expand the capacity much beyond the existing capacity that existed there. If you did, it was by ingenuity. Both proposals showed ingenuity in trying to achieve capacity increases.

I think the 39 million that Paxport proposed was a bit of a dream. The air side wouldn't handle that type of traffic, and this is where we come down to a 30 to 32 type of figure.

So, yeah, our major concern was redeveloping and getting a new, modern, world class facility, a little bit of expansion if it was possible.

Senator LeBreton: Going back to the date that the award was made to Paxport, in the original letter from the ADM (Airports), Mr. Victor Barbeau, dated December 7th, 1992, he listed a number of issues - which you referred to earlier - to be resolved or alternately matters that were not acceptable. I have a copy of his letter. Of course it's dated December 7th, 1992, and it's part of our documentation. I could read the letter into the record, but I was wanting to ask you - I guess I will read -

Senator Gigantès: Is there a document number?

Senator LeBreton: This is the letter from Victor Barbeau - I will have to get the document number. It was -

Senator Gigantès: You'll get Senator Tkachuk very angry if you don't.

Senator Tkachuk: No, she's not making any conclusions senator.

Senator Gigantès: You're only getting angry at the Liberals.

Senator Tkachuk: I'm not getting angry at the Liberals.

Senator LeBreton: It's a letter that we've - it's 001844.

Senator Gigantès: Thank you. Very kind of you.

Senator LeBreton: I will read from the letter because I'm going to ask you how you dealt with each of these concerns in your negotiations. He, of course, advises them that the evaluation committee determined that their proposal was the best overall acceptable response to the objectives and requirements set out in the Request for Proposal.

Your proposal, however, contains provisions which concern the government and cannot be accepted in whole or in part; the following are examples of some of these provisions:

1. The early start option;

2. The restrictions with respect to the diversion of traffic;

3. The allocation of landing rights and gate privileges;

4. The funding mechanism with respect to the employee transfer plan;

5. The terms to be incorporated into the various agreements.

He goes on to say:

Moreover, the changing financial realities within the airline industry are impressing the government with a number of additional concerns, particularly the financeability of your Proposal.

I point out, "of your Proposal", not of the company.

We are prepared to enter into negotiations to reach an agreement within the framework of the Request for Proposals, provided that

1) certain changes required by the Minister are made to your Proposal in order to accommodate the government's concerns; and

2) you demonstrate to the satisfaction of the government by February 15, 1993 that your Proposal, in the circumstances, as financeable.

Your confirmation that you agree with the above provisos must be received by the Department of Transport on or before 5 p.m. EST Thursday, December 10, 1992.

To go back to my question, would you describe how you dealt with each of these issues that Mr. Barbeau outlined in his letter to Paxport?

Mr. Desmarais: I think I mentioned earlier the early start option that Paxport had proposed, which was roughly a 150 million investment with no guarantee of development and taking all the concession revenue, parking revenue into their bank account, if you like, or into their control with no payback to the government as unacceptable. We rejected that outright. We had a different early start option, if you like, at the end, which was the $96 million one with the rent deferral.

The restrictions with respect to diversion of traffic, their proposal asked for 39 million passengers and no diversions and only incremental passengers would be diverted beyond 39 million to some other terminal.

Well, we all know that one passenger can't be diverted. You have to divert the whole group. So that's where we start negotiating back to the 33 million with 1.5 million - the ability to move 1.5 million passengers at any time to another terminal.

The allocation of landing rights and gate privileges - as I say, I have some difficulty with that one. I don't really recall that one, how it was done. I believe they were looking for some definition or some input into the minister's allocation of landing rights and so on. That was not in the cards.

The gate privileges, I'm thinking here that they wanted to be able to gate anybody, including cargo aircraft and so on, and that was also a no-no. These were passenger terminals, but it was that type of thing that was coming through in their proposal that we wanted to get straightened out, that this was a passenger terminal, and it was going to be only used for that, and the minister's prerogative to assign landings rights was the minister's prerogative and nobody else's.

The funding mechanism with respect to the employee transfer plan was really the portability of pensions, the transfer of pensions from the federal government to Paxport with the employee transfer, and how they were then going to fund the pension plan and top it up to give a pension to the employees. That was resolved through the negotiations on the employee transfer agreement. I can't point you to an exact clause, but if you go through that agreement, all those issues were resolved.

The terms to be incorporated into the various agreements, there's probably a list of 50 or 55 that we eventually incorporated into various agreements that the government didn't agree with their proposal. I could probably find you a list, although I don't have one presently before me, of what we negotiated and what the resolution was, if you like.

Senator LeBreton: And then he went on to, you know -

Mr. Desmarais: The financeability issue was the one that was looked at by Paul Stehelin.

Senator LeBreton: That's right.

So is it fair to say that the concerns that were outlined on behalf of the government by Mr. Barbeau were then all satisfied in the process?

Mr. Desmarais: They were resolved.

Senator LeBreton: They were resolved. Okay.

What would you say now, going back to the state of the terminals, especially Terminal 1 - because I'm going to refer to a document that was filed with the committee, a list of documents received from Robert Vineberg as of August 1, 1995. These are court documents. I received them from the committee. One document is a memorandum from you, Mr. Desmarais, to Mr. Mulder with regard to: "1) Restoration of T1 Parking Garage, and, 2) Terminal Life Safety Projects". Shall I read this into the record, or do you want to comment on this?

Mr. Desmarais: I know the memo.

Senator LeBreton: It's a court document. The litigation document number is 5517. It's a court document, 00820436 to 441. This is a memorandum dated July 21st, 1994, so just about a year ago now. It's a memorandum from Mr. Desmarais to Mr. Mulder, who is the Deputy Minister of Transport. I will quote from the memorandum.

If the Minister wishes to continue to apply pressure to gain acceptance of C22 -

meaning Bill C-22 -

- we would suggest that the larger projects of new runways and terminal restoration and expansion with their large economic impacts are more amenable to this. The non approval of the above projects while appearing to give leverage, actually only raise the level of risk to public safety and security which, if an accident occurred, could result in extreme criticism of the government and the Department.

As funds are available to undertake this work, and there do not appear to be any policy or technical reasons not to undertake them, lack of action also results in increased liability with the potential for punitive damages if an accident occurs.

Then it goes on to say as "Background":

Since 1988, Transport Canada has spent approximately 7.5 million in ongoing repairs, but, in recent years, work was deferred pending transfer of the terminals.

It goes on to say:

An opinion has been received from Justice (based on a limited opportunity to consider the facts) that the Government is exposed to liability and possibility punitive damages in the event of personal injury, death, or property damage attributable to the condition of the garage.

Senator Kirby: What's the date on that?

Senator LeBreton: July 21st, 1994.

Repairs required to maintain the structure, through the 1994/95 winter will cost $865,000 and provide for repairs in the ingress/egress routes only.

Then the last part:

The total closure of T1, to offset this problem has been considered but has been rejected, and this would severely restrict the capacity of LBPIA to handle existing traffic let alone any growth.

I could continue on, but it's very obvious from this memorandum, Mr. Desmarais, that you have some very, very serious concerns about the safety at Terminal 1 and, in fact, have warned the government that they are subject or liable in the case of an accident which may happen.

Mr. Desmarais: I don't know if I have warned the government. I've put a memo up to the deputy minister saying he might potentially want to talk to the minister about that.

There were concerns about some of the life safety systems in Terminal 1. The minister subsequently approved the program, and I'm not even sure if it wasn't a day or two later before that memo could even be delivered. Those upgrades have been made at this time.

Senator LeBreton: So are you saying, then, that Terminal 1 - you said a moment ago that you really do believe Terminal 1, in order to probably do the work, should be closed.

Mr. Desmarais: I'm saying if you want to redevelop the terminals and get the maximum capacity out of that area, at some stage Terminal 1 will have to be demolished and replaced by something.

If you look at the types of proposals we are getting in the optimization of that area, you could leave Terminal 1. You could fix it up. You could spend the money to fix it up. It would probably cost you in the neighbourhood of the same type of money to do the complete fixup and bring it back to today's world class standards, if you like, the big problem being the parking garage and bringing that back to standard, not the terminal building itself. So you have to make some choices as a government going forward with any type of development at Pearson.

At today's date, if you're looking at it, you would probably look at an infield terminal or expanding Terminal 3 before you did anything to Terminal 1 because you do need to replace the capacity if you take it out of service. So there's all kinds of issues around Terminal 1.

But the program we were proposing at the time, at that point that I was writing a memo on, was a program that would keep Terminal 1 operational for roughly 10 years so decisions could be made. There were some problems with the sprinkler systems. There's problems with the elevator systems. There's problems with several systems. As I say, all those repairs have been undertaken to date, and there will be more undertaken as we go along.

The Chairman: Senator Kirby, a supplementary?

Senator Kirby: Mr. Chairman, this is really a question through Senator LeBreton to our counsel.

The document being quoted has a number, but it's also a document submitted in the court case, as I understand it. I understand that. I'm not arguing with the fact you have the document, but it seems to me that if in your arguments over what is legal for us to have and what isn't, if we have some documents relating to the court case, then my instinct is we ought to be able to have them all. So I'm just supporting the use of that document.

Senator LeBreton: I'm not going to argue with that at all.

Senator Kirby: No, I know you don't, but its the first time - I guess mentally I've always looked at the other numbers. As you say, that's got both numbers, but since it has a court number on it and since we've been provided with some, I don't know how anybody can decide we can't -

Mr. John Nelligan, Q.C., Counsel to the Committee: I don't think there's any problem with that. I cleared them with the Department of Justice people before I delivered them up, and these volumes were made available, through the clerk, to you.

Senator Kirby: So we can get whatever documents we need?

Mr. Nelligan: Let me put it this way. All I have so far is this one bundle which has come in. What I'm hoping is that we can get the actual - we never got this from Justice. They have them too. They have coded lists of all of the documents, and I'm hoping that we should have access to all of those.

Senator Kirby: I just thought that the fact that Senator LeBreton had quoted that document was a help to my broader question, which is how do we get the documents?

Senator LeBreton: Actually, what I did, I got the list. I just picked the documents up with regard to these witnesses.

Senator Kirby: Okay. I just wanted to make sure that you were aware that in fact that's what it was. That's fine.

Senator LeBreton: Going back to Terminal 1, you probably read or heard the testimony of Mr. Hession where he suggested that if it were not on federal land, the health department would have come in and shut the place down. Of course, you've already spoken of the work that's ongoing there. Is this not tremendously costly, you know, this ongoing repair and patch and fix? As I understand it, the last time I was in Terminal 1, the parking garage certainly wasn't operating to its fullest capacity. As a matter of fact, a chunk of it fell down about three feet from me.

Mr. Desmarais: There are several floors on the parking garage, and I don't know how many, off the top of my head, that are closed because of chloride damage to the concrete. There is serious falling that is causing concrete to drop to the floors below.

Senator Gigantès: I was beginning to think I should change my toothpaste if fluoride can bring down Terminal 1.

Mr. Desmarais: So, yeah, there are some serious problems with the parking garage and several floors are closed.

The statement by Mr. Hession that the fire marshall would close it, I think, is problematic. I mean, yes, there are new codes out there, but the fire marshall usually goes out and works to the codes that a building is designed to. I think a perfect example of that is probably nursing homes, in the last little while, where you see people saying that the new codes say they should all be sprinklered, but there are existing ones that aren't, and nobody is out there rushing and beating the doors in to have them all sprinklered. It's the same here, that it doesn't meet the new existing codes, but it met the code the day that it was built, and that's what it was judged against, not necessarily the new codes.

Notwithstanding that, we're still taking efforts to try and upgrade the most serious deficiencies to the new codes to bring it up to those new codes as quickly as we can. The program I have in front of me - and I will give you a copy of this briefing note if you like, which tries to address that problem, senator - is roughly, give or take, $25 million over the next two or three years.

The Chairman: Mr. Desmarais, this is a rather interesting letter that you've written to Mr. Mulder.

As you know, for the last year - more than that, a year, year and a half - when the matter of Bill C-22 was before the Senate legal and constitutional committee, it was narrowly focused on the constitutionality of that particular piece of legislation. That has yet to be resolved. Those hearings are still taking place.

Time after time, Minister Young has refused - has indicated that the inability to redevelop the Pearson Airport has been due to Tory senators holding up Bill C-22.

Senator Gigantès: Absolutely.

The Chairman: He has indicated there are problems with the lease or problems on this, but time and time again, this has been held up as an example of why the airport can't go ahead, whereas I think you know that there are any number of ways the airport development could go ahead if the Government of Canada was anxious to clear away these so-called impediments - indemnification, expunging, whatever. But your letter indicates:

...even if the title was transferred, the Minister had retained the right to undertake this type of work in keeping with his overall responsibility for a safe, secure, and environmentally safe aviation system -

and that his overall responsibility overrides anything which has been put forward as an excuse before. I mean if people get killed in T1, he's going to have a hell of a time explaining that he couldn't do anything about it because there was a problem with the lease. He hasn't even got a chief executive officer yet for that airport. He has deferred all manner of things.

Now this is a very, very strong letter you have written to Mr. Mulder, and you've indicated what the minister's responsibility is. It's a clear, primary priority that he has.

Mr. Desmarais: I wrote the letter, in '94, sir, as I think the date is. At that time, the issue of the title to the property to T1T2 was clouded. It was still registered to T1T2 Limited Partnership. And as a leased property, we had no right to go in and do redevelopment.

However, in the lease, we did retain the right to go in and make emergency repairs if the T1T2LP did not do that. So under the lease in place, senator, we had the right to go in and make those emergency repairs, and that's all I was referring to.

To do redevelopment of the terminals, as I think was brought up by senators in the Senate during the debates on C-22, was not possible because we did not have title to the land or the terminals at that point.

The Chairman: And unless I missed something, you have spent some money on T1.

Mr. Desmarais: Yes, sir, we have.

The Chairman: How much did you say, I'm sorry?

Mr. Desmarais: We are into a program that's roughly $25 million. The most urgent parts of it have been completed, and it's ongoing right now.

Senator Jessiman: That's Terminal 1.

Mr. Desmarais: Terminal 1 only.

Senator Jessiman: Which has to be demolished.

Mr. Desmarais: Eventually. This $25 million, as I say, will buy you eight to ten years.

Senator Tkachuk: So is that what you've spent, or that's what you plan to spend?

Mr. Desmarais: That's what we plan to spend in the program, this year, next year, and some of it was spent last year.

Senator Tkachuk: So it is $25 million over -

Mr. Desmarais: Two or three years.

Senator LeBreton: And it buys eight to ten years -

The Chairman: Senator LeBreton, you were interrupted.

Senator LeBreton: Yes, that's fine. And it buys eight to ten years for the same passenger capacity, basically?

Mr. Desmarais: Yes.

Senator LeBreton: I just had - going back to Mr. Rowat, and it is a question that I have to ask because I'm curious.

What would have happened if, on October 7th, you didn't sign the release to take the documents? What would have happened? And did anyone ask you your advice as to what would happen if you didn't continue?

Mr. Rowat: No, no one asked, but I assume that we would have talked to the other side about delaying the process.

Senator LeBreton: I guess it is a hypothetical question. You know, we had the Order in Council at the end of August, the announcement by the government, agreement in principle, with all this documentation worked out. In your view, would the government have been subject to an action in the court on the basis of an Order in Council and the Treasury Board approval?

Mr. Rowat: I don't know the legal answer to that, and, as I recall, I don't recall getting any advice on it, but I assume the other side would have some sort of legal - would take whatever legal recourse was available to it. That would not necessarily guarantee any result.

Senator LeBreton: Yes. I suppose I should ask them the question.

Mr. Rowat: Right.

The Chairman: Mr. Rowat, I think this is a fair question to put to all three of you. It requires some educated guessing, and I can't think of any three people who could give better educated guesses than you three.

The latest evidence we have from Mr. Shortliffe and from the people who appeared before us from Toronto, with the general airport authority there, had indicated that, to bring the Pearson airport up to standards - call it whatever you want, world-class standards, modernization, upgrading, whatever the term is - we are looking at 2003. It has never been any lower than that from the testimony we have heard.

From what you know - and it is just an educated guess I am looking for, that's all - if the contract hadn't been cancelled, when would the airport be up to those standards that we're speaking of?

Mr. Desmarais: Roughly 1999, the year 2000, senator.

The Chairman: So we only would have saved three years, let's say?

Mr. Desmarais: Sorry, senator, I'm not following the question. If we had started the program in' 93 -

The Chairman: Yes.

Mr. Desmarais: - which meant a construction start, at the time when we signed, of December 1st, '93, I would say, about seven years to eight years from that point, you are talking about a completely redeveloped facility. So from December '93 to the year 2000, 2001, maybe 1999 if you got some good luck in the weather and so on, you would be delivering a world-class facility.

The Chairman: A total elapsed time of how many years?

Mr. Desmarais: Seven to eight.

The Chairman: Seven to eight years. Well, now if the airport was not being turned over to the new authority until this coming September at the earliest -

Senator Jessiman: It is January-March of next year.

The Chairman: Let's not argue about times. I think the testimony shows sometime in September. I think it was Bandeen who testified to this. Then you are adding - then when do you think it would be completed? Are you putting it up now to 2005 or 2004?

Mr. Desmarais: I'm not putting it up to any point, senator. Studies are under way right now, in conjunction with the LAA, to determine the development feasibility in that area. I don't know what kind of plan they're going to come up with at this time.

If it is a plan that takes into account the growth in passengers that could occur between now and then, it may not even be a quick fix-up for Terminals 1 and 2. It may be Terminal 4 and the infield. Because of the fact of the passenger growth, as I was explaining before, you do not have enough capacity to remove Terminal 1 from this system. Within the next two years, you will run out of capacity if you remove Terminal 1.

So you have that problem. So I don't know what type of proposal the LAA and the airport will come up with, that the LAA may want to pursue when they take over. And the dates I have is as early as July '96, they could take over. The study should be completed by that time. Then you're looking at their funding, and how long that would take, I don't know; and I don't know what their program would be.

The Chairman: I accept that. I didn't mean to be as probing as I was. I was hoping, of course, that you'd come up with an answer that said, if we'd started in '93, we'd be all through by now. And the other case, if it started, it would be 20 years from now. I was looking for that kind of an answer. It was educated guessing I was trying to get at.

Senator LeBreton, you're through?

Senator Tkachuk: Most of my questions will be to Mr. Jolliffe and Mr. Desmarais, but I won't know exactly who will know the answer, so just sort of come in, and, Mr. Rowat, if you can be helpful.

On the unsolicited proposals you gave evidence to earlier on today, where were they sent?

Mr. Desmarais: In what sense?

Senator Tkachuk: Who gets them? Where does it go to?

Mr. Desmarais: Basically, I believe all the unsolicited proposals we were looking at were sent to the minister's office and then subsequently sent to the deputy, down to the airports group through the ADM's office.

Senator Tkachuk: So whoever the minister was would receive it, fire it down to the deputy, deputy would send it into the department, probably through the airports group?

Mr. Desmarais: In the case of these proposals, to the airports group.

Senator Tkachuk: And then would they go somewhere from there?

Mr. Desmarais: They would generally go to a director general. At that time, there was a director general of strategic planning and special projects. He would have been given it. That was Mr. Berigan, whom you talked to the other day. He would then send a copy to the site to get their comments, and his own comments, and talk to various people. Depending on what the proposal is all about, he might talk to Treasury Board, Finance, PCO, several groups of people, about the proposal, and then prepare a reply back for the minister's signature.

Senator Tkachuk: And the minister then would sign a letter saying, sorry, but no thanks.

Mr. Desmarais: In these instances, yes.

Senator Tkachuk: So the minister did it in all five instances?

Mr. Desmarais: I believe so, yes.

Senator Tkachuk: He even did it for Mr. Matthews.

Mr. Desmarais: I believe it was Mr. Hession at the time.

Senator Tkachuk: So we have five different companies sending in unsolicited proposals. The reason I'm asking these questions is because, you know, we're here because we're discussing, frankly, politics, as well as -

Senator Gigantès: No? Perish the thought.

Senator Tkachuk: - as well as the process itself. So I just wanted to make it clear that there was five unsolicited proposals and, in all five cases, the minister wrote a letter back, including Mr. Matthews, and said, thanks but no thanks.

There is such a thing as an unsolicited proposal program, as was mentioned earlier.

Mr. Desmarais: Yes, generally, it's a research and development program.

Senator Tkachuk: Could any of those proposals have triggered that, or would this have been considered too big for that, that someone would have said, no, we can't do it this way?

Mr. Desmarais: Generally speaking, the unsolicited proposal process I know is for pure research almost, something that is untried, never been tried before, in the sense of a physical thing, a machine, a device, a process. This is terminals. It is well known "technology", if you like, so this would not trigger that process.

Senator Tkachuk: So not a big secret, if you like?

Senator Hervieux-Payette: May I ask a question of clarification on your question?

Senator Tkachuk: Sure.

Senator Hervieux-Payette: How much would you say companies spend, in order of magnitude, to put together a proposal? Would you say that they spend a quarter of a million, half a million, a million or more, in order to put together what you received as far as the proposal we're talking about?

Because we use the same word, but we know that a proposal can be very extensive and ready to go, or it can be a proposal that is only a scheme or an idea that you put on a piece of paper but you don't have all the nitty-gritty financial aspects of it.

So I want it know, since we are talking about proposal with an "S", if we are dealing with the same type of proposal, that people would be ready to sign a deal the next day, and it was sufficiently detailed that the government knew what they were saying no to?

Mr. Desmarais: The Paxport proposal, as I recall it, and I'm not sure of the limitations, the time limitations on the dollars, the Paxport proposal cost $5 million to submit to the government. The ATDG proposal, I think, was asking closer to 10.

Senator Hervieux-Payette: And the unsolicited proposals?

Mr. Desmarais: Unsolicited proposals, I have no idea. I'm just telling you the big proposals, ready to sign, that we got -

Senator Hervieux-Payette: I know, but when we talk about unsolicited proposals, I was just wondering if we were talking about the same thing. The proposals, I know, had to be detailed; they were replying to your RFP and, of course, it had to contain all the details that you were requesting.

But those that you received that were unsolicited, were they as detailed? Were they as comprehensive? Were they representing just an idea? And did they have the same scope of development in terms of the proposal they were making to government?

Mr. Desmarais: They did not have the same scope as the proposals we received for the request for proposals. Some of them had concept drawings. I believe British Airports proposal, Canadian Airports Limited, came in a big, fairly thick, glossy book, so it was well done and well presented, but it was just a concept book.

I believe the first book we saw from the Matthews-Paxport group, if I can call it that, was again a relatively slim volume of about 20 pages, giving us a concept to consider. I don't think they were anything that we would have signed on the spot.

Senator Hervieux-Payette: So they were totally different things. You were talking about, more or less, because you are in that department, a pre-feasibility part of a proposal, compared to a total feasibility, turnkey project?

Mr. Desmarais: Right.

Senator Tkachuk: You know lots about this stuff.

Senator Hervieux-Payette: - that's why I think it is important that we -

Senator Tkachuk: Did you get work from the federal government in the 1980s?

Senator Hervieux-Payette: I was working with the SNC group. I guess the SNC group was working with everybody who wanted to give them work, in the country and abroad.

Senator Tkachuk: I guess they did.

Senator Hervieux-Payette: And they got a lot of work from the Conservative government -

Senator Tkachuk: I always thought SNC Lavalin should have been privatized.

The Chairman: Put forward an unsolicited proposal.

Senator Tkachuk: That's right. Should have privatized Lavalin a long time ago.

I want to go back to what I was trying to get at with the unsolicited proposals and the saying of no. It doesn't really matter much to me. It was just the fact that lots of people in the industry were aware of the fact that the government was moving in this direction. And that's why I asked that question, and that's why I wanted to make it clear that there was public policy here in the sense that the letters were written back and that there was somebody responsible. You said the minister would have had to make this decision.

When the RFP - when the minister made the announcement, and then said that there would be private sector involvement through leasing of terminals, and the RFP proposals were being prepared, who was put in charge of that operation?

Mr. Desmarais: Basically, the airports group, and the lead director general was Mr. Berigan.

Senator Tkachuk: I know I have cultivated this ground before, but I want to cultivate it again: the minister, obviously, in charge, then the deputy minister in charge, then the airport manager in charge.

Now, the airport manager - so the way it would flow is: minister, deputy minister, airport manager. The airport manager then puts somebody else in charge?

Mr. Desmarais: No, sir. The way it would flow would be minister, deputy minister, assistant deputy minister -

Senator Tkachuk: Oh, assistant deputy minister, yeah, in charge of airports. We're talking about the same person, the same thing.

Mr. Desmarais: And then, depending on the process, he may choose a headquarters director general or the site manager to be in charge. In this case, in Ottawa, the man I worked for was Mr. Berigan. He was put in overall charge in Ottawa with input from Mr. Heed.

There was a small committee developed. And I wanted to get back to the steering committee the counsel brought up earlier that was looking at the RFP. And it had a membership, if I can refer to it, that was chaired by Victor Barbeau, who was the assistant deputy minister. It had the airport general manager, Toronto, on it, which was Mr. Heed. It had the major Crown projects general manager, who was Mr. Ed Warrick. He was working out of Toronto, and he was charged with Terminal 3 at the time and had also been charged at that point with starting to develop the Southern Ontario strategy, and so forth. It had the director general of corporate planning and special projects, who was Mr. Berigan.

That was the steering committee. Mr. Berigan and Mr. Heed's staff then worked on putting together the various approval documents and the RFP, and so on, and doing the policy studies and looking at the policy issues necessary to be resolved before going ahead, before an RFP.

Senator Tkachuk: So the RFP process would have started shortly after the announcement?

Mr. Desmarais: I think it started beforehand, sir. I think it had started probably in the early summer of 1990.

Senator Gigantès: May I ask a question on this term?

Senator Tkachuk: Is it a supplementary?

Senator Gigantès: A clarification.

Senator Tkachuk: Oh, sure, go right ahead, senator.

Senator Gigantès: You said the RFP process started before the announcement saying that there was a request for proposals?

Mr. Desmarais: Yes, sir. The development of the RFP process, the policy issues to be resolved in that whole process started in roughly the early summer of 1990. Mr. Lewis made his announcement in October 1990, that there was going to be a private sector proposal call -

Senator Gigantès: So from the summer until October, you were working up the conditions.

Mr. Desmarais: Working at the conditions, looking at the policy issues and starting to get into the policy studies and what had to be resolved.

Senator Gigantès: Thank you.

Senator Tkachuk: As decisions were made in the RFP proposal, how would they be made? You've got your committee. You've got people working on stuff. Paper is flowing, and you're making these - sort of organizing. What happened to the paper? How did you check off the things that you wanted to put in there? Was there a -

Mr. Desmarais: There was a list developed of policy issues and potential policy issues that was subsequently taken to ministers.

Senator Tkachuk: What would they be?

Mr. Desmarais: Participation of Terminal 3 operator is one I remember. Canadian content of the ownership structure of a consortium was another one. There were many, many issues like that.

Senator Tkachuk: When the final RFP was put together, who would have checked all that off? All of the committee?

Mr. Desmarais: I'm not sure all the committee did, sir. I know I looked at it. I know Mr. Berigan looked at it in Ottawa. Mr. Power developed it. He would have talked to Mr. Heed about it before sending it to Ottawa. It was then checked through commercial development.

Mr. Warrick was no longer with the department when this came up, so the committee had really become smaller. Most of the stuff could be done by phone. Most of the work and approvals, if you like, within the airports group were between Mr. Heed and Mr. Berigan and would be subsequently ratified by Mr. Barbeau and then taken through the rest of the approval process.

Senator Tkachuk: There had to be a lot of people happy before it was finished?

Mr. Desmarais: There had to be a lot of people satisfied.

Senator Tkachuk: Right. That's what I really wanted. What about Justice? Did Justice have to be happy or satisfied, too?

Mr. Desmarais: Justice took part in the drafting of it out of their Toronto office.

Senator Tkachuk: The Air Canada question keeps coming up in this RFP, and you made reference again to that earlier.

The RFP or the documentation room had information as far as the contract was concerned, up to 1997, as far as the lease was concerned to Air Canada. It was a question of the option that was missing.

Mr. Desmarais: It was the question of the guiding principles that was missing. That's all.

Senator Tkachuk: The guiding principles that was missing.

Mr. Desmarais: And I hesitate to say missing. "Missing" implies that they were put in there and became lost. They were never put in there.

Senator Tkachuk: Right. You mentioned they were discussed. Were they discussed within that committee?

Mr. Desmarais: I'm not sure if they were discussed within the committee. I remember having discussions myself with Mr. Berigan and, I believe, Mr. Heed on the issue. But I don't know if that was ever taken back to the committee. I was never part of that committee.

Senator Tkachuk: You weren't part of that committee?

Mr. Desmarais: That's correct.

Senator Tkachuk: But you would have hoped they would have discussed it, or would you have assumed they would have discussed it?

Mr. Desmarais: I would assume that when the decision was made, it was ratified by somebody. And as I said earlier, I had the discussion with Mr. Berigan. I was given the decision back and so I assumed it had been ratified by more senior managers.

Senator Tkachuk: You've probably seen this letter by Mr. Desrochers, document 006 - I can't read the number on it. I think it is 657, is it, counsel? 00657, August 26, '91, to the deputy minister Mrs. Labelle.

Mr. Desmarais: I'm not sure if I've seen it, sir.

Senator Tkachuk: Anyway, Mr. Desrochers is the executive vice-president and chief operating officer of Air Canada. In the letter, he says,

Dear Mrs. Labelle, over the past few years -

- and this is August 26, 1991 -

- has been in constant contact with Transport Canada regarding the development of Terminal 2. It has now come to their attention that Transport Canada is about to proceed with a Request for Proposals for the further development of Terminal 2 and Terminal 1. I would like to emphasize to you that, in our April 4th submission, to Transport Canada, Air Canada proposed an alternative that we feel meets the objectives of Transport Canada and Air Canada. In view of the tremendous success of our joint efforts to redevelop Terminal 2 over the past two years, I urge you to consider our proposal prior to proceeding with the RFP process. Also, I would like to remind you of correspondence between Air Canada and Transport Canada in 1989 wherein an agreement was reached between your predecessor Mr. Shortliffe and Mr. Dennis Groom, an executive vice-president of Air Canada, on guiding principles for Air Canada's long-term lease negotiations at Terminal 2. It is my opinion that this agreement has not been discharged and is still in effect. I am enclosing copies of the relevant correspondence for your reference. I think it would be beneficial if we could meet to ensure a full understanding of the issues and would appreciate hearing back from you at your earliest convenience.

Signed Lee Desrochers, copy to Claude Taylor and a copy to Victor Barbeau.

Now, this was sent to Ms Labelle. Were you aware that either Mr. Barbeau or Ms Labelle had been made aware of this, and that, obviously, Air Canada had made them aware of the fact that this should be part of the consideration when they were doing the RFP. Were you told anything about that?

Mr. Desmarais: I'm aware of the letter and I'm aware of it from Mr. Berigan's office. And both letters, both from the DM and Mr. Barbeau's copy, came to Mr. Berigan's office. I'm not aware if the deputy or Mr. Barbeau read those letters. In the department, it is a habit to have an executive assistant look at letters and distribute them to the officer in charge, if you like.

So I can't swear that they saw the letters, only that they came to Mr. Berigan's office.

Senator Jessiman: Did you read the letter?

Mr. Desmarais: I believe I saw them at the time, yes, sir.

Senator Jessiman: That's before the RFPs were completed.

Mr. Desmarais: Yes, in 1991, I believe, August.

Senator Jessiman: May I just add one more?

Senator Tkachuk: Sure.

Senator Jessiman: Thanks. Do you think, at the time when you drew the RFPs, that the words:

Air Canada's capital investments were made with the expectation that it would have the ability to enjoy the benefits of those investments over a reasonable and normal amortization period.

Do you think those words were put in to cover what we're talking about? It certainly doesn't seem enough to me, but - what do those words mean?

Mr. Desmarais: Basically what they say, that Air Canada had spent some money on the terminal; they had a reasonable expectation of having it amortized.

Senator Jessiman: But the next line says the lease comes to an end in '97, which is four years later.

Mr. Desmarais: Which is what the letter we had quoted earlier says, when we had asked them what conditions they wanted us to put in the RFP. And we were tracking their language. So I'm not sure where we're going here.

Senator Jessiman: I just wanted to know what - you knew about it.

Mr. Desmarais: Yes.

Senator Jessiman: You were responsible for drawing this document.

Mr. Desmarais: Yes.

Senator Jessiman: And it wasn't put in.

Mr. Desmarais: It wasn't put in place -

Senator Jessiman: You wouldn't say to the people that are going to answer or make a proposal: Look, now, these documents are out there, you better go and look at them, and we will have them in the room where you can go and look at all of our documents. You didn't say that.

Mr. Desmarais: We said we would have all the contracts and all the leases in the room and all the technical information on the site, in a room. We didn't say we would have every little piece of paper Transport ever signed vis-a-vis T1 and T2, in the room.

Senator Jessiman: No, but this is your main tenant -

Mr. Desmarais: That's correct.

Senator Jessiman: - in Terminal 2, and you're talking about a 40-year lease.

Mr. Desmarais: Yes, and there's a lot -

Senator Jessiman: And it's true, no one knows whether it is a lease or it isn't a lease.

Mr. Desmarais: That's correct.

Senator Jessiman: We all agree with that. But you sure as hell can't say it isn't something that you had - that Transport Canada signed, and there may be - and, certainly, Air Canada took the stand; from what we've heard, there is some obligation there.

And I would have thought, those - you know, everything is easier in hindsight, of course, but you did have that. You knew it. I can't believe you directed your mind to it at the time. I guess your saving grace is, you sent this clause, so I'm told earlier, to Air Canada, and they knew that's how it was going to be proposed. So maybe they're estopped for not doing something about it.

I'd like to see the letter where you sent the clause to them. Can you provide us with that?

Mr. Desmarais: I will look for it. I'm not sure if it's in productions now, so I will have to have a look.

Senator Jessiman: Will you do that, because I think that's pretty important.

Mr. Rowat: I wonder if I could just ask a question of the date of that letter you are referring to, from Mr. Desrochers?

Senator Tkachuk: Just a minute, to make sure - August 26, '91.

Senator Gigantès: Is there a document number?

Senator Tkachuk: Yeah, I read it, 000657.

Senator Gigantès: Thanks.

Senator Tkachuk: You're welcome. I'll do it twice for you any time, Senator Gigantès.

Mr. Desmarais: I was just looking at the March 28, 1991 letter, from Mr. Desrochers to Mr. Berigan replying to the request to provide input to the RFP. And that is where we come across the statement from Air Canada to the effect that, in June 1990, Air Canada recommended the Paxport proposal to the Minister of Transport.

As of March 6, '91, Air Canada - Paxport that it's severed its relationship. Air Canada's input to Transport Canada - the RFP - represents the wishes of Air Canada alone.

Next page, it says, Air Canada will - it goes into this, they don't want an auction to occur, will vigorously and oppose an RFP process that seems to lead in that direction. Air Canada will, in addition, insist, that its non-cancellable lease, which effectively extends through to April 30, 1997, be fully recognized, and Air Canada's rates thereunder, including rental rate reviews based on current cost recovery policies, be protected and maintained. That is all he asked for.

And he is setting, I believe - in his letter, he is trying to set a negotiating position for the next round.

Senator Jessiman: Do we have that?

Mr. Desmarais: I'm not sure if you have that.

Mr. Rowat: 000483.

Mr. Nelligan: That is the one that I referred to the witness earlier today.

Senator Tkachuk: Now, when we - I'm going to jump a little bit to the call for - because other testimony has already talked about the process for developing the call for proposal, the government announcing it, Mr. Lane and all the rest of it. So I'm going to just jump a little forward to - and Senator Hervieux-Payette also talked about what happened immediately after and December and the announcement. You explained quite well what the announcement really meant.

And so I'm just going to jump forward to the rent deferrals, which has caused great consternation here. Like, it was sort of like a - it's a very complicated or a big deal. But I mean, I've just been in small business most of my life, and rent deferrals are not unknown to me. You know, I rent a couple of thousand feet. So it is really putting off the rent. It is almost like a loan, is it not?

Mr. Desmarais: In a sense, I would assume.

Senator Tkachuk: You're charging interest. You're saying that, some day, that rent will be paid back?

Mr. Desmarais: Yeah.

Senator Tkachuk: That's what you're saying. So instead of paying the full rent, the first three years of a ten-year agreement, you would pay maybe half the rent, and then you'd take the other half of the rent, push it back into the next seven years and you'd pay it over that time with a 10 per cent interest rate, or whatever it may be.

The concept itself of a rent deferral, simply put, so the ordinary voter out there - you know, the hundred or so that may be watching out there - will understand what we're talking about, that this is not that complicated.

As a matter of fact, they are not even that complicated for other airports. Are there rent deferrals in any of the LAAs?

Mr. Desmarais: I believe there are.

Senator Tkachuk: So, like which ones?

Mr. Desmarais: I believe Montreal has one. I believe the option is there for Vancouver to have one. I'm not sure about Calgary and Edmonton. I haven't looked at those leases.

Senator Tkachuk: Vancouver has one.

Mr. Desmarais: Vancouver has the option in its lease, and I believe Montreal is exercising that option right now.

Senator Tkachuk: Exercising that option. So out of the four - is it four other airports that are under LAAs now?

Mr. Desmarais: There are two in Montreal, one in Vancouver, one in Calgary, one in Edmonton.

Senator Jessiman: Does Mirabel have one?

Mr. Desmarais: Mirabel and Dorval are part of the Montreal airports group.

Senator Tkachuk: Montreal is getting a rent deferral. Vancouver has an option. Do the other airports have an option?

Mr. Desmarais: I'm not sure. I believe Edmonton does. I'm not sure about Calgary.

Senator Tkachuk: After today, they'd probably like one, right?

Why would they be granted a rent deferral, the LAAs?

Mr. Desmarais: I didn't negotiate those leases, sir, so I have no idea.

Senator Tkachuk: Very good. In the T1T2 contracts, the rent deferrals, they were really - just so we understand that the government didn't give anything up so much - this was in exchange for immediate construction and extra cash, right? Is this sort of what it was, election coming up, get this thing moving? You know what I mean?

Mr. Rowat: The merger agreed to spend $96 million to get it started immediately. In the first three years, the rent was deferred in light of that, to be recouped over the following 10 years.

Senator Tkachuk: At an interest rate of -

Mr. Rowat: At an interest rate of prime plus two and a half.

Senator Tkachuk: Okay. And also because Air Canada - who wanted this work done right away, besides the government? Did Air Canada? There was some urgency, it seems from the - did Air Canada think this was a good idea to get their stuff organized? Or was the government more concerned about it or the department more concerned about it?

Mr. Desmarais: The Phase 1A, which is the quick-start phase - and if you look at your drawing there, you will see it, that we handed out. In red is basically the new rapid-air processor for Air Canada and expansion of the trans-border area in Terminal 2, which is basically the Air Canada trans-border area. These were items from the Air Canada master plan that they had delivered to us earlier, and they were anxious to see work commence on it.

The rapid-air obviously moved - rapid-air and transborder areas in Terminal 2 are adjacent right now. They wanted to move the rapid-air out to expand the transborder area. So you needed a rapid-air processor to expand the transborder area. So this is what's happening in that first phase.

Mr. Rowat: The other answer to your question is that, yes, the government thought it was a priority because of the job creation that would be involved. If you recall, at that time, the economy was in the doldrums, even in Toronto.

Senator Tkachuk: Yes. Do you have - like, how many people would have been working there? Do you know? Do you remember that?

Mr. Desmarais: On what, sir? The first phase?

Senator Tkachuk: Yeah.

Mr. Desmarais: Not off the top of my head. I believe there were numbers developed, but I can't remember them right now.

Senator Tkachuk: Significant, though, that the government thought this was important.

Mr. Desmarais: Right.

Senator Gigantès: Depending on the good judgment of the government.

Senator Tkachuk: It always depends upon the good judgment of the government when it comes to jobs.

Let me just ask some questions, just in concept, about leasing an airport and local airport authorities. Again, cultivating a little of the same ground here, but I just - a local airport authority, are they, kind of, given the airport?

Mr. Desmarais: The airport is leased to them for a rental payment that is negotiated. And, again, it's basically a no-worse-off position for the government. So the government would get a rental payment based on being no worse off over the course of the lease than if they operated themselves. And the LAA benefits from any input and economic development they can do to that airport, and is able to use the money then as a non-profit organization to further develop the airport.

Senator Tkachuk: So you lease the whole airport?

Mr. Desmarais: We lease the whole airport.

Senator Tkachuk: And you lease it to - and local airports authorities are non-profit?

Mr. Desmarais: That's correct.

Senator Tkachuk: Now, "non-profit" only means one thing: They don't pay tax. This isn't some organization that helps sick children and sends money to Ethiopia or something. This is a non-profit that doesn't pay tax.

Mr. Desmarais: And the profits, if any, are to be reinvested on the airport.

Senator Tkachuk: But if they would have profits, they wouldn't pay tax either.

Mr. Desmarais: I'm not sure of the tax laws -

Senator Tkachuk: That's why everybody loves the word "non-profit", including the people who run them, because you don't have to pay tax. Right? You don't pay any tax.

Mr. Rowat: They would be tax-exempt.

Senator Tkachuk: So when you figure out the amount of revenue that the government is getting between an LAA and, say, a - it seems to me, I mean, I may be over-simplifying it, but in one case you lease the whole airport; in the other case, you lease a couple of terminals. Right?

Mr. Desmarais: Yes.

Senator Tkachuk: In both cases, you're leasing.

Mr. Desmarais: That's correct.

Senator Tkachuk: Just to corporate entities. One is non-profit, one is profit. No big difference here, corporate entity-wise?

Mr. Desmarais: Corporate entity-wise, all right.

Senator Tkachuk: Then they get rent from the two terminals in this particular case, or you get rent from the whole airport, or whatever. You just get rent. That's all the government gets is rent.

Mr. Desmarais: That's correct.

Senator Tkachuk: And what it tries to do is be no worse off than it was if it didn't rent.

Mr. Desmarais: That's correct.

Senator Tkachuk: Does it take into account - in the cash flow, do you take into account lost taxes?

Mr. Desmarais: Whose cash flow, sir?

Senator Tkachuk: When you take into account the money that the government is getting, you're taking into account leases in one particular case and leases in another particular case. Do you figure in, when you're doing this, the amount of tax you're losing in case of them making a profit?

Mr. Rowat: The other way to answer the same question, is do you consider how much tax would be earned in leasing it to a private sector corporation?

Senator Tkachuk: Yeah, do you produce whole - I know Finance produces whole books of those.

Mr. Rowat: They do, and there are so many different tax laws that, yes, conceptually, you're correct. There is an extra tax benefit to the government under a private sector lease that we were talking about. But it is hard to calculate that until you know exactly how the company you're dealing with is going to set itself up in terms of tax. But overall, there would be a positive tax benefit to the government under the private sector leasing arrangement.

We did not formally calculate it into the numbers, but we noted it, as did Mr. Stehelin when he did his analysis, that it was a factor that would be added over and above the rent to government.

Senator Tkachuk: Okay. Now, the private sector lease - I am almost done - I think I'm almost done my half-hour here. Am I done my half-hour? Well, why don't I just quit now?

Senator Kirby: Mr. Chairman, if Dave only has a few more minutes, I'm quite happy to let him go, and then I'll run out the session. Sorry, what time do we adjourn?

The Chairman: We adjourn at 9:30, but I'd like your advice. Mr. Nelligan is going to require, say, 20 minutes for wrap-up questions. We adjourn at 9:30.

Senator Kirby: Is he doing those today or when we finish with the witnesses?

Mr. Nelligan: I thought I would do them tomorrow.

Senator Kirby: Normally, he's at the very end.

Mr. Nelligan: I may not have 20 minutes if you ask all the questions.

Senator Kirby: All I say is I'm quite happy to let Dave go ahead and finish, and then I'll run out the clock, and then we can continue tomorrow.

Senator Gigantès: I need three minutes, if you can squeeze three minutes in for me somewhere.

Senator Tkachuk: That leaves me five minutes. I thought my half-hour was up, so I was going to, like, pack it in and let someone else do it.

The Chairman: It is five minutes to nine. We're in a second round. Senator Gigantès hasn't had a chance yet in the second round. It's only going to be three to five minutes?

Senator Kirby: Rather than interrupt Dave, can we let Dave finish?

The Chairman: Yeah, and then you can run it out after -

Senator Kirby: And then let Senator Gigantès -

The Chairman: Okay, fine.

Senator Tkachuk: I lost track of - okay, I think I remember where I was.

We're talking about taxation, and the fact that governments - in this particular case, you're not taking into account the fact that, in a local airport authority, you wouldn't be getting tax revenue.

So in the case of Terminal 1 and Terminal 2, the private sector development would be based on them getting money from equity and borrowing, and then earning it from concessions, leases, et cetera, et cetera. Right?

Mr. Desmarais: That's correct.

Senator Tkachuk: Why did the government not let them - why were they - or were you opposed to the passenger facility charge? Would the Department of Transport - did they like the passenger facility charges?

Mr. Desmarais: There has been a policy under development on passenger facility charges within the department for the last little while. I'm not sure of the status of it. But in the case of Toronto, we have a particular problem with passenger facility charges. The government cannot apply a passenger facility charge to Terminal 3. We don't own it, we don't operate it. So we would only be able to apply a passenger facility charge to Terminal 1 and 2, which puts Air Canada at a marketing disadvantage and all the airlines in Terminal 1 at a marketing disadvantage, as compared to the airlines in T3.

I mean, if you had a choice, senator, you would opt for the terminal where you didn't pay the fee, is the way the story goes. So there was a very serious concern that, if you put it only in T1T2, you may have serious problems with the airlines in Toronto.

Senator Tkachuk: They are charging a passenger facility charge in Vancouver because they have to do some airport expansion, which isn't the case in Edmonton or Calgary or Montreal airport authorities, because you've got excess capacity. Is that not correct?

Mr. Desmarais: You have excess capacity in Edmonton. I'm not sure how Montreal's capacity is at Dorval. I know they have -

Senator Tkachuk: But you've got Mirabel -

Mr. Desmarais: You have a little bit at Mirabel.

Senator Tkachuk: - which has got - you know, you've got a little bit. They all have long-term leases in the airport authorities, right? How long would they be?

Mr. Desmarais: Basically 40 years with a 20-year option, I believe. So a 60-year -

Senator Tkachuk: Sixty years. Now, if I remember correctly on the Paxport concept, and then Pearson Development Corporation, a whole bunch of cash had to be put up in equity. How much cash in equity was put up?

Mr. Desmarais: For Pearson?

Senator Tkachuk: Yeah, Pearson Development Corporation, for the lease.

Mr. Desmarais: The initial stage is $61 million and that built over time, I believe, but I'm not sure what the absolute total number is versus their total investment program. I think we have it here. But I - $258 million over the course of the whole development.

Senator Tkachuk: In equity?

Mr. Desmarais: In equity. And a debt of $484 million.

Senator Tkachuk: Two-hundred-fifty-million dollars in equity and four-hundred-million dollars in debt. Now, where in heaven's name is the Toronto airport authority going to get $250 million?

Mr. Desmarais: You will have to ask them, sir.

Senator Tkachuk: Well, I'm asking you, as officials in the Department of Transport, how do you think they're going to get it?

Mr. Desmarais: Basically the way Vancouver did it. Go to the bank and -

Senator Tkachuk: And charge.

Mr. Desmarais: You have to somehow pay off that debt over time. I'm not sure how they do that.

Mr. Jolliffe: Senator, it's not equity that they're getting; they're getting debt. There's no equity in the local airport authority. They are 100 per cent debt-financed, as I understand it. They borrow the money they need for their expansion. They earn equity over time by ploughing back earnings into their business -

Senator Jessiman: Based on what they can get over and above what they pay the federal government. The federal government has to get as much as it always has gotten, and it has to be up to their entrepreneurial skills to be able to get that. And they have no equity in there themselves, so it is just a - you're just transferring - you know, as much as we love you guys, bureaucrats or civil servants or whatever, we're just transferring from you people to another group. They're not bureaucrats but they're appointed by bureaucrats, so I don't think we're any better off. And they're going to have to do exactly what you did four or five or six years ago.

All this work that you've done to try and develop this thing, and you've done a hell of a lot of work, and it's all gone to waste, and it's a disgrace.

Senator Tkachuk: I'm not - I'm in a different - I don't know. Like, it doesn't really matter to me. What bothers me is why - the reason we're here is to discuss the contract and to discuss the deal to the Canadian people and to discuss whether it was a good deal for Canada if we would have gone with the T1T2 proposal and the Pearson Development Corporation. But if you take that away, there has to be options. Right?

The option will be the local airport authority. So what you're saying is, the Toronto airport authority will have to borrow all of their money for development. There will be no - well, how can they have equity financing?

So it is a hell of a way to run a business, though, if you start with 100 per cent debt and no equity.

What if Canadian Airlines or what if Air Canada cuts back on the amount of traffic going in? Like, what happens if there is a downturn in the economy? What happens here? Who bails them out?

Mr. Jolliffe: They have a form of equity, senator. They have an opportunity to operate and manage the airport, and that produces cash flow. And that is equity to them which is in their hands, the same as equity that might be subscribed as shareholder in normal corporations. So they have that in-built cash flow being produced right now as an operating airport.

That is an equity base that they have, the surplus cash flow over operating expenses. Using that, and, of course, the PFC-type funds, they can borrow the debt they need then to rebuild the runways and the terminal buildings.

Senator Jessiman: Don't they ordinarily charge extra? They're either going to charge extra for the public, as they're doing in Vancouver, and someone is saying they may be doing in somewhere else. And they're doing it at $5 for residents of British Columbia, and $10 for North American, and $15 of international people. That's how they get it. It's charged to the people who are using facility.

Mr. Rowat: Well, they -

Senator Jessiman: That's what their charges are.

Mr. Rowat: There is a -

Senator Jessiman: That's where they get the extra amount.

Mr. Rowat: There is provision, as in Vancouver, for a PFC, a passenger facility charge.

Senator Jessiman: Yes.

Mr. Rowat: And that is the way that they would raise the kind of money they need, so they -

Senator Jessiman: So it is the public. It is the public who uses it that is going to be paying.

Mr. Rowat: That is correct. But what all operators of airports must keep in mind is that there is such a thing as competitiveness of the airports. That is one of the considerations at Pearson. How do you keep the costs of T1T2 relatively competitive with Terminal 3, so you don't overprice one vis-à-vis the other, and, as John has said, make one terminal preferable to the other for the travelling public, and also, over the long term, to make sure that you don't outprice an airport, overprice an airport, vis-à-vis other centres in North America.

Senator Jessiman: It is really more important, isn't it? There is competition in the airports. That is, there could be if you had different owners of each terminal. I understand that there is not any other airports that have different ownerships? Is that correct?

Mr. Desmarais: Of the terminals?

Senator Jessiman: Yes.

Mr. Desmarais: Yes, there are. Kennedy airport in New York -

Senator Jessiman: Which one?

Mr. Desmarais: JFK in New York has different terminal owners, albeit airlines but they're different airlines for different terminals.

Senator Jessiman: All right. But the real competition is between Toronto, Detroit, Pittsburgh, New York, Chicago, because what you're vying for, a lot of it, is for taking people from and to Europe and Asia. And if you have a first-class airport here in Toronto, it's going to attract more people.

And it's really - so even though you might have what some people call a monopoly here for the domestic part of this airport, it'll work better and be more efficient, and it'll be more competitive with the other airports. And that's more important to Toronto and to Ontario and to Canada.

Senator Hervieux-Payette: Or they may stop in Mirabel, then they won't have any problem.

Senator Jessiman: Maybe some day, I hope, as long as you don't leave.

Senator Hervieux-Payette: Plenty of space, plenty of gates.

Senator Jessiman: That may be another -

Mr. Desmarais: Just a quick comment coming back on the PFC at Vancouver. Montreal airports have opted for a different way and they have shown profits the last two years of, I believe, 25 to $30 million, which they are now using as equity to borrow money to do roughly a $200 million program, I believe, to do major -

Senator Jessiman: Sorry, I didn't hear where the $20 million came from.

Mr. Desmarais: They are showing profits in their balance sheets of 20 to $30 million a year over the last two years at Montreal airport system, and I believe they are looking at a long-term capital program and borrowing money against that equity, if you like, to go on with that.

Senator Tkachuk: So they build up so much cash reserves and are borrowing against it?

Mr. Desmarais: That's correct.

Senator Jessiman: Are they doing it more efficiently than you were able to do it, and that's why, or are you asking for less money?

Mr. Desmarais: I'm not going to comment, sir.

Senator Jessiman: Well, I mean, do you know the facts? Don't you know? Didn't you people make these contracts?

Mr. Desmarais: I will say that the LAA probably has more ready access to capital than we as a department did, because we couldn't go off-budget to borrow it and we had a deficit problem.

Senator Tkachuk: Chairman, I have gone over my time, and why don't I just finish some of this. I only have about - I want to get in a totally different thing tomorrow. So why don't I just end it with a few of these questions tomorrow and then continue on. I'm done.

The Chairman: All right. Senator Gigantès and then Senator Kirby to finish up.

Senator Gigantès: Thank you. You said Canadian content, and it sort of struck me. What did you mean by Canadian content in building up the contract?

Mr. Desmarais: The ownership structure of the consortium, or T1T2 Limited Partnership, or whoever bid, had to have a certain Canadian content. And I'm not sure of the exact number that was ended up with. But you will recall that, in the NTA, for instance, airlines have to be 75 per cent Canadian-owned, I believe is the number. And that's the type of number we were looking at, and I think we ended up at a number of around 50 or 51 per cent, that it had to be Canadian controlled. But I won't swear - I can't recall the exact resolution of that one, senator.

Senator Gigantès: And the North American Free Trade Agreement has nothing to say about that?

Mr. Desmarais: Not in that sense, I don't think. And besides, this was in advance of the North American Free Trade Agreement. The RFP went out in '92. That wasn't signed until January '94, I believe.

Senator Gigantès: I am new to this, so I am more ignorant than my colleagues around the table, if one could say that.

Senator Kirby: I think he means in the subject matter, Mr. Chairman.

Senator Gigantès: In the subject matter, yes. It sounds as if, you know, to an outsider who doesn't understand this, as if it took an awfully long time to get this contract done. Were you guys in Transport dragging your heels?

Mr. Desmarais: I don't think I was. I don't think anybody else I know was. We were working very diligently to get this out and done.

Senator Gigantès: Mr. Jolliffe, were you?

Mr. Jolliffe: I didn't feel I was with dragging my heels, senator.

Senator Gigantès: And you said, Mr. Desmarais, that nobody else was, in your view.

Mr. Desmarais: Not to my knowledge. The people I worked with were not dragging their heels on this.

Senator Gigantès: I was a public servant for some years, an unhappy experience. Were you guys defending your turf and trying to hold on to an airport, rather than letting it go?

Mr. Desmarais: I believe I subscribe to the philosophy that Mr. Barbeau presented the other night, was that, in defending my turf, I kill myself. My job is to deliver government policy, whatever that policy is, of the day. If I don't deliver that, I'm more likely to end up in dead than in -

Senator Hervieux-Payette: Gardening.

Mr. Desmarais: Or gardening.

Senator Gigantès: Well, on one occasion, I suggested to my deputy minister that he could abolish his whole department and privatize it, and I was killed. But I was un-defending my turf in that case. Thank you.

The Chairman: Senator Kirby?

Senator Kirby: Thank you, Mr. Chairman.

Before I get to the issue that I wanted to come to, can I just clarify, I think, Mr. Desmarais, what you said about the RFP and the failure to get the Air Canada's so-called guiding principles into the room?

What you said was - I want to be sure I understood you correctly, that's all, because I didn't make notes. So if I remember incorrectly, just tell me - that you had said to people, as you put it, up the line from you, that you had reminded them about the Air Canada guiding principles, and you had assumed, therefore, that that was going to be included in the material made available to bidders. Is that correct?

Mr. Desmarais: I said that the guiding principles issue we were aware of during the RFP. I had discussions -

Senator Kirby: During the drafting of the RFP.

Mr. Desmarais: During the drafting of the RFP. And I had several discussions with Mr. Berigan. And, at one stage, I was given the decision that it wouldn't be in the RFP, and that came from Mr. Berigan and I assumed he had got that decision from higher up.

Senator Kirby: Did you ask why it was not to be in the RFP?

Mr. Desmarais: No, sir.

Senator Kirby: Do you have any idea why it was not in?

Mr. Desmarais: As I said, we had the letter from Air Canada -

Senator Kirby: Which made it iffy.

Mr. Desmarais: Hmm?

Senator Kirby: Which made it iffy, made it unclear.

Mr. Desmarais: It was iffy. We had the 1990 Air Canada letter saying they supported Paxport wholly, which sort of put the '89 guiding principles in doubt if they supported wholly the privatization, which meant leasing the terminals to somebody else. That put it in doubt. So there was quite a bit of doubt around whether these things still existed, if you like, or had been, in legal terms, repudiated by the other side.

Senator Kirby: So the failure to put the guiding principles document in the room or in the RFP could hardly be described as a deliberate attempt to sabotage what was going on?

Mr. Desmarais: No, sir. As I said, the room was meant for leases, licences, contracts, that were binding and in place at the time. This was something that was in dispute as to whether it was binding and was not necessarily in place.

Senator Kirby: Then can you explain, what are your views on why some of the previous witnesses, Mr. Broadbent in particular, effectively described the failure to put those guiding principles in the room, the fact that they were only discovered very late in the game, I think, March or April, why was this such a shock to everybody? And why was it couched to us from the witnesses as almost a deliberate attempt, that someone had deliberately attempted to sabotage the operation?

Mr. Rowat: I think, as I had stated earlier today, it's probably difficult to comment on why the previous witness would cast it that way.

Senator Kirby: Is it fair to say it was exaggerated, that that casting is exaggerated?

Mr. Rowat: At the time, when I went through this file, I felt it was a bit more dramatic and exaggerated than was actually the case, and that there are a number of documents on file that were provided to me in late June that indicated that there were at least two views on the interpretation of those guiding principles, and that a case could be made equally forcefully on the other side.

Senator Kirby: I wonder if I could turn to a couple of documents, and I always distribute documents at the time I do them, but in this case I want to refer to two that Senator Bryden actually used last week, so I didn't - I don't think - I'm looking at my assistant. I don't think I duplicated them.

The first is document number 001107, which is a Treasury Board - Senator Bryden introduced it last week. It was not the one that caused the problem. Senator Bryden introduced it last week.

I don't know if we have - Ross, do we have a copy for the witnesses? Okay.

Mr. Chairman, let me switch the order. I was going to do something. I will come to those in the morning. I was going to refer to two documents that Senator Bryden actually tabled, but I'm happy to do it tomorrow morning. I'll switch documents and go to something else now. 001107, it's a Treasury Board document.

It's okay. I'll come back on those in the morning.

Let me go to something I know I have copies of. In the course of duplicating everything, I didn't duplicate the copies of the two documents that Senator Bryden had referred to.

Ross, can I go to my document labelled letter C which is number 001520. It has a letter C on it. It is a memorandum to Huguette Labelle as deputy minister of Transport, to Paul Gauvin.

We have copies of them, senators.

Would you give a copy to the witnesses?

I want to take you -this will finish the day, Mr. Chairman.

I just want to take you through the document and ask you a couple of questions about it. Okay?

Mr. Rowat, just tell us what this document is, first, who Paul Gauvin is, because that's a name we haven't seen before, and then just tell us briefly what the document's about, and then I just want to ask you a couple of questions about it.

Mr. Rowat: Okay. Paul Gauvin was the assistant - is still the assistant deputy minister for finance and administration, I think it's called. Is that the correct title?

Mr. Desmarais: Yes.

Mr. Rowat: And is the department's senior financial executive, financial advisor.

Senator Gigantès: Transport.

Mr. Rowat: Right, Transport.

Senator Kirby: And this document is a comparison of the Paxport proposal with the Transport Canada base case. Can you define what you mean by - if you read it, you will find Transport Canada base case means keeping T1T2 in Transport Canada's hands. Is that right?

Mr. Desmarais: Basically, yes, and the costs associated with that.

Senator Kirby: You'll notice that what this does, is it compares Paxport's proposal with - let me just call it the Transport Canada base case. Why would such a study have been done more than a month in advance of Paxport actually having been awarded the contract? The timing strikes me as odd.

Mr. Rowat: I will have to ask Mr. Desmarais on that. That was November -

Senator Kirby: Right. I'm sorry, Mr. Rowat. I was asking the question of whoever can -

Mr. Desmarais: I think you'll find at the bottom of the page, of that letter:

It says these findings have been submitted to the Airports Group, for its use in preparing a submission to Ministers.

So this was input-type information we were using to take the evaluation forward for approval.

Senator Kirby: So you did not do a comparison with the Claridge proposal? You did not do a similar comparison with the Claridge proposal?

Mr. Desmarais: I don't believe so, at the time.

Senator Kirby: Why?

Mr. Desmarais: Because at this time, we know at Transport Canada who we're going to recommend to ministers. We have known this since basically August. We are awaiting the audit done by RCMP, which came in, in October, so -

Senator Kirby: We should clarify for the record that - this is a television audience.

Mr. Desmarais: Yes.

Senator Kirby: RCMP is an accounting firm called Raymond, Chabot and two other names.

Mr. Desmarais: Yes, out of Montreal.

Senator Gigantès: Martin, Paré.

Senator Kirby: You understand the problem of using that.

Mr. Desmarais: Yes, I do. Anyways, we had been awaiting the audit report from them which we received in October. We had the evaluation report which was completed in mid- September. And now we were moving forward to make a presentation to ministers on that. We knew who we were going to recommend, and this was work being done leading up to that document going to ministers.

Senator Gigantès: When you are talking about RCMP, Raymond, Chabot, Martin, Paré evaluation, is this the thing in which they say: We studied the methodology of the methodology because we wanted to know if the parameters of the first methodology were applied when using the second methodology, but never touched the substance? Is that the one?

Mr. Desmarais: I'm not sure I follow your statement, senator.

They did two reports.

Senator Gigantès: I didn't follow the gentleman from -

Senator Kirby: The short answer to your question is yes.

I want to go through the study for you but before I do that, do you want to comment on the second-to-last paragraph on the covering sheet?

In fact, why don't you just read it into the record, and I am interested in your comments on it.

Mr. Desmarais: Do you want me to read this in?

Senator Kirby: Yeah, just the one that begins with the conclusions.

Mr. Desmarais: It says:

The conclusions of the analysis done so far appear on page 11. They may be summed up by saying that the Paxport proposal, as it stands, would certainly leave the Crown better off financially, but only at a very high cost to the airlines and travelling public.

Senator Kirby: And were you part of the team that did this?

Mr. Desmarais: No, sir. This was done in the financial group, not the airports group.

Senator Kirby: Would you agree with that conclusion?

Mr. Desmarais: Yes, sir.

Senator Kirby: And yet, the airports group, among others, was going to be recommending to the Crown a proposal that clearly left the Crown better off - I don't think anyone has ever argued about that - but, as the conclusion puts it, at very high cost to the travelling public and to the airlines.

Mr. Desmarais: If the proposal was accepted at face value, yes.

Senator Kirby: Okay, I wonder then if you can -

Senator Tkachuk: Could you ask him to clarify why?

Senator Hervieux-Payette: On page 11.

Senator Jessiman: No, he is asking the witness why.

Mr. Desmarais: Because the Paxport proposal had proposed renegotiating the lease with Air Canada from day one, which would have - and I have heard various estimates here. Keith, was the lease double the cost they were currently paying, immediately, with no construction? That cost would obviously have been passed on to passengers, so you were starting to build very serious costs quickly, without any pay-off to the airlines or anybody else. So there were very high costs to the airlines and to the travelling public, if we accepted the proposal at face value, although we did get a lot of rent.

Senator Jessiman: That's why you put in the conditions in the letter when you accepted the proposal.

Mr. Desmarais: That's correct.

Senator Tkachuk: So they'd be paying about the same amount as Canadian was paying out in Terminal 3.

Mr. Desmarais: At that time, but then it would escalate as the construction started going ahead.

Senator Tkachuk: If they continue to subsidize Air Canada, then the travelling public is better off, right?

Mr. Desmarais: I am not saying that.

Senator Kirby: Come on, guys, I've got 10 minutes left.

Senator Tkachuk: I'm looking at this and I'm not an accountant, and I can figure out what this says.

Senator Kirby: Mr. Chairman, I'm generous in being interrupted, except I am up against the clock, right?

Senator Tkachuk: I know, I'm sorry. Go ahead, Senator Kirby.

Senator LeBreton: We were just getting a little tired of the spin.

Senator Kirby: Spin? I just asked him to read what was said in the document. I mean, it's not my spin. I understand why you don't like the spin, but don't accuse me of doing the spin.

Senator LeBreton: Come on, Senator Kirby, you're not on Canada A.M.

Senator Kirby: No, unfortunately, I don't have Huey here, which would be much more entertaining.

Can we turn to - I want to have you take us through the document just on a couple of points. Mr. Rowat?

Mr. Rowat: Just in follow up to your previous question, that clearly says, and as John has agreed, that it would be a very high cost to the airlines and the travelling public.

The process drew to a conclusion, designated an overall best acceptable proposal. And then, in the conditions that went out, Victor Barbeau very clearly stated that there were concerns over the financeability of the proposal, in light of the financial realities within the airline industry.

Senator Kirby: Right.

Mr. Rowat: Impressing the government with additional concerns. I think, even though they chose the best overall proposal, they realized there were certain concerns with that, put it in there, and said, Let's negotiate it.

Senator Kirby: Okay. Can we turn to - I just want to touch on three or four issues as we go through.

Turn to page 3, which is your revised base case. As I understand it, your revised base case - which again, just for clarification for everybody, the base case still means that T1 and T2 continue to be owned by -

Mr. Rowat: The federal government.

Senator Kirby: You propose a capital program which is consistent with Paxport's. Is that what your first assumption meant?

Mr. Desmarais: That's what it says there, yes, sir.

Senator Kirby: And yet you subsequently negotiated a solution with Paxport which was significantly less than the 767. Is that correct?

Mr. Desmarais: Yes, sir.

Senator Kirby: And therefore, in fact, the revised base case, in terms of a capital program was, in fact, substantially better than the agreement that you ultimately ended up with. Is that right?

Mr. Desmarais: You've got to bear with me here. The $767 million is in 1992-93 constant dollars, and if you take that out to current dollars, it will end up at, give or take, $858 million, which included $686 million in terminal construction and, roughly - the rest being in commercial development, a couple of hotels and a conference centre, I believe.

In negotiating the contract, we took out the hotels and the conference centre, and ended up with just the terminals.

Senator Kirby: In any event, the reality is that the revised base case has a better total capital injection than the agreement that was ultimately negotiated?

Mr. Desmarais: Yeah, it's a little bit high, compared to what we originally got. That's considered as all-terminal.

Mr. Rowat: Because the comparison had changed of the elements involved in it.

Mr. Desmarais: That's correct.

Senator Jessiman: Do that again, please, Mr. Rowat?

Senator Kirby: Yeah, I was going to say, run that by me again.

Mr. Rowat: When this analysis was done, it was a comparison between the Paxport proposal then and the base case at that point.

When the final Mergeco proposal was finalized, there were different elements in that than the base case, as originally drafted.

Senator Jessiman: Was it as good or better than the base case?

Mr. Rowat: It was not comparable.

Senator Jessiman: Okay, apples and oranges.

Mr. Desmarais: I think, trying to compare this case to the final deal might be apples and oranges.

Senator Kirby: By the way, that triggers an interesting question and I want to come back to this document. Did you, before agreeing on the final package, ever come back and, in a sense - I mean, I understand why you did this. You did this piece of analysis, so ministers could compare this logical alternative, make government continue to maintain control or owning T1 and T2, with a proposal.

Mr. Desmarais: That's correct.

Senator Kirby: You then proceed to negotiate a new proposal. And when I ask you to compare the new proposal with the base case, you tell you can't do it because it's apples and oranges.

Do we, in fact, ever, anywhere, have a comparison, before we finalize the deal, with what genuinely ought to have been compared, which is the negotiated deal on the one hand, with the revised base case on the other?

Mr. Rowat: If you refer to Mr. Stehelin's document, and you will have him as a witness subsequently, following this, you will find that, in fact, he did do that comparison and made an attempt, I think, to point out the kinds of differences that you have to deal with between the two models, and made an attempt, in his analysis, to try to equate those various assumptions.

Senator Kirby: You have an advantage. That's not a derogatory comment, but you just have an advantage. Any witness that's more than 24 hours away, we haven't looked at the stuff yet. So I have got to take your word on that, but I haven't looked at Mr. Stehelin's documents.

Mr. Desmarais: To be more succinct, Senator Kirby, I believe there was a base case done in early August of '93.

Senator Kirby: And do we have that -

Mr. Desmarais: I'm not sure if it's been produced or not, sir.

Senator Kirby: It might be useful, Mr. Chairman. I'm not asking for it now. I'm just saying if we could find it -

Mr. Rowat: I should just point out that the documentation that I received as part of this process, which I assume is the same as yours, includes the Stehelin letter with a number. I could find it for you.

Senator Kirby: By the way, I understand, in the documents we got, there is a document from Mr. Stehelin, but when I realized he was coming, to be honest with you, I didn't take the time to go through that one because that's next week.

Okay. Can I ask you a couple of comments on your - continuing on the base case assumptions. On, I guess, the fifth bullet point, second one from the bottom, you talk about user charges to the airlines would be raised to T3 levels, calculated in dollars per passenger. And then you translate that into dollars per passenger in the next line.

Then over on page 5, the second-to-last bullet point says that user charges to the airlines would increase at a 1 per cent real annual rate beginning in '93-'94, representing a highly pessimistic minimum.

What do you mean by a highly pessimistic minimum? That is to say, you deliberately did a calculation based on keeping increased user charges to the airlines down?

Mr. Desmarais: I believe that should read optimistic rather than pessimistic, senator.

Senator Kirby: It marginally changes the intent of the sentence.

Mr. Desmarais: Yes, I know. I will tell you, in base cases I have looked at after this point, that 1 per cent was considered - 1 per cent real growth, i.e., 1 per cent plus inflation was considered optimistic if the government continued to operate the terminals. That's why I said, it should probably read "optimistic", but I would like to check that with the author.

Senator Kirby: It also makes a lot more sense to me. You understand my confusion because, on the one hand, you were arguing you were concerned about whether the airline could sustain increased charges. On the other, you describe 1 per cent real, which is more than 1 per cent -

Mr. Desmarais: It is 1 per cent plus inflation.

Senator Kirby: I understand that. I was having difficulty - so, the answer is, "pessimistic" ought to be "optimistic".

Mr. Desmarais: I believe so. I can check with the author if you like.

Senator Kirby: No, no - you might just let me know, because at least I understand it now, which I didn't when I first read it.

If I can carry you over to page 10 - actually, let me take you to page 9. At the bottom of page 9, we have - this is, again, continuing the financial comparison with Paxport.

You again have a series, depending on the base case you're using, you have an indication that there would be substantially increased passenger charges, as you say, $9.05, or more than three times under Paxport's proposal than current, and then higher under the other cases.

At any point in this discussion or analysis, was there any concern given - really, to go back to the comment on the covering note, for what the impact would be on passengers? Or are we back at the covering note where the Crown is going to be well off, but the airlines and the passengers are not going to be and tough?

Mr. Desmarais: I think, senator, we were all concerned with the cost of the airlines and the passengers right through the evaluation process. I heard Connie Edlund before this committee two weeks ago raising points about how things were going to change. Her report was an effective précis of the business committee evaluation report, if you like. We were knowledgeable of what the charges were going to be. We knew the proposal was high. We had concerns with it. And we were going to try to address those in negotiations.

Senator Kirby: You know what? I have heard you guys use that - I have heard the three of you comment several times with a phrase that we were going to try to address this in negotiations. There sure were a lot of issues that you were unhappy about in the original proposal, that you were going to try to fix up with negotiations.

I mean, how many - I don't know if I've ever seen a negotiation where people were so unhappy with an initial proposal, and yet they proceeded to take it as the one they were going to negotiate around. I mean, at some point -

Senator LeBreton: Where did they -

Senator Jessiman: Where did they say they were unhappy with it?

Senator Kirby: No, I'm sorry. Sorry, his comment was, several times tonight, or this afternoon and tonight, these gentleman have used a sentence, such as they used a minute ago, which is: We essentially didn't like that, but we were going to try to negotiate around it. I'm just paraphrasing what they said. Exactly what they said.

All I'm saying is, there seemed to be an awful pile of issues about which you felt that way.

Mr. Rowat: Senator, if you look at the letter that Victor sent, it outlined the kinds of issues to the company that the federal government was looking at renegotiating. In fact, in the final analysis, all of those issues were negotiated and a conclusion was arrived at, including this one, which you will undoubtedly get at tomorrow, what the final arrangement was with Air Canada, and hence what the passenger charge or cost of this airport is.

And the final conclusion that we drew, or the final negotiated package for this item, ended up being - bringing the cost of the overall airport, of this terminal, down into the relative range of Terminal 3, so that they were cost competitive. And hence that passengers weren't paying nearly as high a cost as the company had in its original proposal.

So I think it's the answer to your question. And frankly, this analysis, I think -

Senator Kirby: I don't know what you're holding up.

Mr. Desmarais: TC base case.

Mr. Rowat: This analysis is the one that - zero, zero -

Senator Kirby: Okay, its the document we're talking about. You just said "this". I didn't know what you were holding up.

Mr. Rowat: That analysis, I think, you would be far better to set aside and come back and look at the comparison that you're getting at in the final agreement, which is comparing the base case in the final analysis with what we actually -

Senator Kirby: With a revised base case.

Mr. Rowat: - with our revised agreement in the final analysis. That is an appropriate comparison. You're asking us to prepare their original proposal with a base case that was prepared in November of '92.

Senator Kirby: Well, you did that. I mean, that's what this document does, right?

Mr. Rowat: It's true. It's true, but -

Senator Kirby: I mean, I didn't ask you to do it. You guys, Mr. Desmarais's group - sorry, finance guys did it.

Mr. Rowat: But the kind of questions you are getting at are, implicitly, what did you finally conclude in all of these things? So if you're going to ask those kinds of questions, perhaps it would be better to go straight to the bottom line: What did we negotiate during the summer of '93, and how does that compare with the base case? It would be simpler for us to answer those questions.

Senator Kirby: Except, for what it's worth, I don't have that study. You tell me that study exists.

Mr. Desmarais: I believe so, senator, and we will have to get that for you. We'll do that.

Senator Gigantès: But isn't a bit like negotiating a pre-nuptial agreement after the shotgun marriage?

Mr. Desmarais: We haven't been married yet here, senator.

Senator Gigantès: You were going to an agreement. It seems that there was a decision to go into this agreement, despite all the difficulties, and the difficulties would be negotiated afterwards.

The Chairman: Gentlemen, I call it 9:30.

Senator Kirby: Mr. Chairman, if it is possible, I am happy to take Mr. Rowat up on his offer, except I don't have this other comparison. So can I ask that, if someone can find that other comparison between now and tomorrow morning - which may not be possible, I understand, I'm not complaining if it isn't - that would be helpful.

Mr. Nelligan: The August Stehelin report is available.

Senator Kirby: But he's suggesting there may be another document in addition to this one.

Mr. Desmarais: I am suggesting that there may well be another base case done in late July, early August, '93.

Mr. Nelligan: I made a note of that. I don't know of it specifically but we'll try and find it.

Mr. Rowat: Just to add to that, there is a document that you do have that may be of some assistance and it's 000073, and it's a document dated October 29, 1993. It's Briefing dec, Terminal 1-Terminal 2 privatization.

It is a summarized document, but it will point out the kinds of comparisons that we did. And I think it will be a document that will help clarify a number of issues for you in one concise comparative table.

Senator Kirby: Can I also say - I assume I am back on tomorrow morning, is that right? Because I certainly didn't get a half - come on, I only got about 10 minutes.

Senator LeBreton: How long did he have to -

Senator Kirby: Maybe 10 minutes, thanks to -

The Chairman: Okay. Okay.

Senator Gigantès: You were interrupting all the time, Senator LeBreton.

The Chairman: All right. We adjourn to 9 o'clock tomorrow morning.

And thank you, again, gentlemen, for coming back. You've been very patient.

The committee adjourned.

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