Proceedings of the Special Senate Committee on the
Pearson Airport Agreements
Evidence
Ottawa, Wednesday, August 16, 1995
[English]
The Special Senate Committee on the Pearson Airport Agreements met this day at 9:00 a.m to examine and report upon all matters concerning the policies and negotiations leading up to, and including, the agreements respecting the redevelopment and operation of Terminals 1 and 2 at Lester B. Pearson International Airport and the circumstances relating to the cancellation thereof.
Senator Finlay MacDonald (Chairman) in the Chair.
The Chairman: Yesterday, I may have mentioned, or I failed to mention, but Mr. Rowat, because of the misunderstanding, the in-house misunderstanding with regard to the Air Canada matter which you were present at the resolution of, could you tell me roughly how long the resolution of that problem delayed the negotiation process?
Mr. William Rowat, Deputy Minister, Department of Fisheries and Oceans: When I took over the file in the middle of June, as I mentioned, I met with Air Canada and then the two parties together. I was there as an observer. And then roughly within two weeks after that, on the direction of the minister, I worked with Air Canada and PDC to arrive at what we thought was a possible outcome, and that is what I took back to the minister. So it was probably late July, mid to late July.
The Chairman: Senator Kirby is the mathematician. How long a period would that have been?
Mr. Rowat: About a month. Little more than a month.
The Chairman: A little more than a month. Thank you. I think yesterday when we adjourned, I think Senator Kirby was continuing, hadn't finished, so, Senator Kirby.
Ladies and gentlemen, again, if you could get closer to the microphones when you are speaking rather than lean back, and keep in mind that the court reporters are trying to get everything in, so if you want to ask a supplementary or interject, just put your hand up. It is a lot easier than just hollering across one another.
Mr. Rowat: Senator, if I could make one comment. When I said the negotiations for Air Canada on that issue took a month, you asked whether it delayed the negotiations. The rest of the negotiations were proceeding in that period of time, so I wouldn't call it an actual delay of the negotiations. On all of the other matters that were still outstanding, we were proceeding with Pearson Development Corporation in that same time period.
Senator Kirby: Can I just ask a supplementary on that before I get on to my other stuff? Does that mean that, in a sense, the Air Canada issue so-called did not result in a prolonged extension of the negotiations? What you did was add another parallel stream, is what I understand you just said. Is that right?
Mr. Rowat: That's correct. It was by far and away the biggest issue.
Senator Kirby: I'm not arguing it wasn't difficult. I asked you about time. It didn't have a time effect.
Mr. Rowat: Those other elements that I outlined to you earlier, I was - we were negotiating those at the same time.
Senator Kirby: Okay.
Senator Jessiman: Mr. Chairman, did your predecessor Mr. Broadbent tell you how long he'd been working on the Air Canada issue before the proposal?
Mr. Rowat: He didn't tell me, but the Air Canada issue had been a central focus throughout the discussions. And it was an issue that had been left with Mergeco to deal with Air Canada on. So that during my predecessor's regime, as far as I know, he had no direct intensive consultations with Air Canada on this issue. It was left to Mergeco to deal with.
The Chairman: Okay. Senator Kirby.
Senator Kirby: Thank you, Mr. Chairman. What I want to do, I'm going to ask my assistant to distribute - these are two documents that I started to talk about last night because they were introduced by Senator Bryden when he was here. And then people said they didn't have copies, so I said I'd hold off. We got them duplicated overnight.
Just for the record, one is document 001107, which is a Treasury Board memorandum, and the other is a document which is the minutes of a meeting which Mr. Rowat chaired, and it's numbered 001711. I just want to go through a couple of issues related to these documents.
First, with respect to the Treasury Board document, which again just to summarize where we were last time, the Treasury Board document was a document from Sid Gershberg in Treasury Board to Mel Cappe. Mel Cappe was probably program branch - sorry?
Mr. Rowat: Deputy secretary, programs, at Treasury Board.
Senator Kirby: Right. They've changed the title, but it's what I would have called program branch, deputy secretary. And Ian Clark was the secretary; right?
Mr. Rowat: Right.
Senator Kirby: Just a couple of questions about that analysis. I'm just curious from the - because at the time this document was done, May 19, you were still in the PCO; right?
Mr. Rowat: Correct.
Senator Kirby: All right. Did the Treasury Board briefing notes get sent to the PCO? I mean, were you aware of these documents, or not necessarily this specific one, but just generally? Historically, central agencies trade information pretty widely. What happened with that?
Mr. Rowat: I would not normally see their documents, but our analysts kept in regular touch, so that, generally speaking, they shared information amongst the analysts at PCO Finance and Treasury Board.
Senator Kirby: It would be fair to say that if one of the central agencies was concerned about a particular problem, the others would know about it?
Mr. Rowat: In most cases, correct.
Senator Kirby: Okay. On the bottom of page 2 of that document, I will just read from the last bullet point on the page. It says "rent deferred", but it should be "rent deferral".
- rent deferred could be seen as further subsidization of the airlines, with Air Canada being the primary beneficiary;
This is under a subheading of "Issues of Concern to TBS."
And it then goes on to talk, on the bottom of the second last bullet point on the next page. It says:
Transport needs to strike an agreement that can stand an independent test as being financially sensible and in the government's best interests. Transport must have a bottom line ...
In all of the documents we have read, it is very difficult to understand if Transport truly did have a bottom line because - I guess I would like to ask you, was there a bottom line? Can you tell us in some sense how near the bottom line you got? What I'm trying to understand is whether or not every time the other side put an issue on the table, we didn't agree to negotiate around it and give up something, not necessarily everything the other side asked for, obviously. Or was there a clear position that we would walk away from the table and cease negotiations?
Mr. Rowat: There were essentially - let me just deal with the issues one at a time.
On the one that you raised on page 2, the $11 million rent deferral, that was an issue clearly I think reflected in this Treasury Board memo. The issue there was started in or came to a head in early May when essentially the - I referred earlier that there had been a number of DMs meeting. The DMs had concluded that the $96 million option should be the one rather that the $47 million early start option. At that point, the conclusion of that group was that the risk for the most part should go to Pearson Development Corporation.
The second issue associated with that, with the timing of when T1 should close, the government's - the position then of the government was that T1 should close only at stage three. So that was in early May.
Pearson Development's response to that was clearly that, yes, we would go with the $96 million, but we do need an $11 million deferral over three years. Their approach was, we will defer it over three years, but we will pay it back over the residual of the agreement. In other words, I guess that would work out to 52 or 53 years.
Subsequent senior level official meetings concluded that that was still not appropriate, that that would still appear like the government was subsidizing - the perception would be that the government was somehow subsidizing the operation and the other arguments that I think are probably reflected in the Treasury Board document.
By late May, that issue came to a head. At that point, the issue was resolved by the government, and it was the government's directions to officials that we should take the $11 million deferral for three years and choose the shorter time frame of the ten years plus interest, two and a half points over prime.
So that is the sequence of events on that issue. If you're asking about the other issues on Air Canada, the Air Canada situation referred to before was that Air Canada's position was that they were not in a financial situation to afford any increase in the first three years. So to the extent that this rent deferral solved that first three year issue, then that issue with Air Canada was in essence off the table, so that one was solved.
Air Canada's second major concern, as I referred to before, was the long-term rent situation beyond 1997, and they felt that that was extremely high for a number of reasons. They had emphasized that the government rent was high, and that flowed through to them for them to pay; number two, they indicated that they would like to or they felt that airlines should be sharing in the revenues from Pearson Development Corporation, from their commercial revenues; and number three, that they felt that they should be reimbursed for the investments they had made to date. That was in essence what the government had to deal with and what I had to deal with when I took over.
The bottom line for the government on that particular issue was to make sure that the rents to the government did not fall below the next best alternative and that there be a competitive rate at the airport vis-a-vis Terminal 3 and other airports.
Senator Kirby: Can I ask you two questions on that? You used the phrase I think even in your opening comments about the next best alternative. What was the next best alternative?
Mr. Rowat: The analysis that we had done was the base case or Crown construction.
Senator Kirby: Not the revised base case? Because in the document that I was referring to last night, there is a base case and there is also a revised base case.
Mr. Rowat: We revised the base case to be equivalent to the kinds of activities that would go on under what we were negotiating. Like, as John explained, we dropped a couple of items out of the negotiated agreement with Pearson Development Corporation, so we standardized them for those.
Senator Kirby: I thought that's what you'd done. I knew that from reading the document. When you said "base case" a minute ago, you really meant "revised base case" in the terminology. Am I right?
Mr. Rowat: Right.
Senator Kirby: What you attempted to do is to compare your negotiated position vis-a-vis this revised base case?
Mr. Rowat: Correct.
Senator Kirby: And as I hear you, you said you compared it primarily on - in fact, I think you almost implied exclusively on the issue of return, the return to the government. That was the driving objective.
Mr. Rowat: No, there were a number of considerations.
Senator Kirby: Because a minute ago you said you compared it on those.
Mr. Rowat: Let me back up to make it clear. The return to the government was one consideration, and the competitiveness of the airport was the other consideration. In other words, the return to the government can be as high as you want to make it, if you want to put in a PFC, passenger facilitation charge. You can put in a $10 or $15 passenger facilitation charge and charge 30 million people going through, and you can generate hundreds of millions of dollars. But at the same time, you can make that terminal or an airport relatively uncompetitive over the long-term if you insist on charging that kind of money. So one of the overall objectives was to bring the per passenger cost of that terminal into a range that was competitive with T3 and with other airports and terminals in North America. That was the comparison that we had done.
Senator Kirby: So you were using essentially the twin objectives of return to the government, on the one hand, and keeping the terminal competitive, on the other; am I right?
Mr. Rowat: I'm just reminded, and maintaining - our objective was maintaining a world-class facility, was to develop and maintain a world-class facility. These objectives, by the way, are laid out in the beginning of the request for proposals.
Senator Kirby: I know that, but the problem with any multi-objective, the problem is that ultimately you are forced in a negotiation to make trade-offs; right?
Mr. Rowat: Correct.
Senator Kirby: I was trying to understand the ranking. As I heard what you said before, the return to the government, among the three options, I'm not saying - originally I thought you said it was the only one. I think what you were really saying was that it was the primary one.
Mr. Rowat: Okay. Let me just comment further. In the final analysis, the rent to the government compared to the original proposal from Paxport, the rent to the government was brought down. The original charges to the airport were high, and those charges to the - sorry, to the airlines were high and were brought down. The original profit level that Mergeco had predicted for themselves was high. That was brought down, using their models and our financial analysis, was brought down to a range which our financial analysis said was appropriate, in the 12 to 14, 12 to 16 per cent range.
In the final analysis, the airport, the terminal itself, in terms of cost per passenger, an issue you raised about people thinking about passengers, on that issue, the cost per passenger was also brought down into a range that was roughly in the range of T3, whereas before it was considerably higher than T3.
So in essence, in the final arrangement, Air Canada agreed that they would pay a higher rent, not as high as they were originally being requested to do, but a lot higher than they had been paying. They were getting a world-class facility, as far as they were concerned. The government was getting a lesser rent, but that rent was still better than a Crown construct, the base case model. Mergeco had agreed to take a - had reduced their profit expectations and had agreed to share the net revenues from commercial operations - I think it was 10 per cent - with the airlines. And they also agreed to cut back on their capitalization rate. And the airport came in on a competitive range with the other terminal, with other airports.
So it was a case of when you say you have a number of factors you are dealing with, it was a case of trying to bring them all together into a package that seemed to be the most appropriate, seemed to work.
Senator Kirby: In that case, if you look at the first bullet point on the top of page three of that Treasury Board memo, what is your response to Treasury Board officials saying, and I will just quote from the document, and then you can comment on it -
- the Mergeco deal is already heavily in favour of the developer, (i.e. low risk, high rates of return) and further concessions are unwarranted; and
Mr. Rowat: I don't know what they mean by high risk. I mean, that depends on what a person's assessment is.
Senator Kirby: High is in the eyes of the beholder; right?
Mr. Rowat: That's right. I should say at that point I may well have agreed with them. That was May 19, and at that point, that was before we negotiated the final package. At that point, I think they were - I can't recall what it was, but it was considerably higher than their final estimate of 14 per cent. It may have been in the 16 or 18 per cent range.
Mr. John Desmarais, Senior Advisor to the Assistant Deputy Minister, Airports Group, Transport Canada: Eighteen per cent.
Mr. Rowat: Eighteen per cent range. So at that point I probably would have agreed with that analyst myself.
In terms of low risk, I do not think that anybody looking at the final arrangement would regard the Mergeco as having a low risk situation.
Senator Kirby: So what you're saying is that around town, analysts differed in terms of - at any given point in time, I presume even on the final deal, analysts differed in terms of whether the deal was good or bad or whether a particular position was good or bad?
Mr. Rowat: I think in early to mid-May, this position that the Treasury Board had on items, like I said, on the high rates of return, that there would have been very little disagreement over that point, because at 18 per cent, I think maybe some people in the Department of Finance felt it was within the range but certainly in the upper end of the range. But I think we all felt that there was a lot of room to bring it down.
Senator Kirby: But am I correct in saying that inevitably, wherever you ended up, analysts would have had differing opinions as to whether it was good or bad simply because good or bad in that sense is a subjective judgment?
Mr. Rowat: Where we ended up? Where we ended up, the arrangement that we ended up with in mid-July was an arrangement that was based on our negotiating positions as laid out in the black book that I referred to the last time we testified. And let me just refresh your memory on this. When I came in in the middle of June, at that point we pulled together all of the central agencies and prepared the black books, which took our negotiating positions on each of the items and came up with a bottom line on each of the items. In essence - you have referred to another memo on June 22. Subsequent to that, because there were a lot of - there were a lot of different opinions around up to that point,
Senator Kirby: Up to June 22.
Mr. Rowat: Up to June 22 on different issues, but there was also agreement on some other issues at that point when I basically said to the other central agencies, "We are preparing a common federal position." This is the black book. We did that. We circulated that around to them and said, in essence, "Get your comments in now, because this is what we are going to use to negotiate, and we want to negotiate from that common book. We don't want people coming back later saying, `We didn't agree to the federal bottom line.'"
So that was the process. So if there were differences of opinion by the middle of July or whenever, I was not made aware of it.
Senator Kirby: So in a sense you forced everybody into an agreed negotiating - I mean everybody in town into an agreed -
Mr. Rowat: That is certainly what I attempted to do.
Senator Kirby: We should talk sometime about how you - not in this forum, Mr. Chairman. Having tried that myself, I understand the agony of what you went through.
I wonder if I could just ask you a couple of questions about the second document which I guess is the one you just referred to a minute ago, the June 22 document. Just to get back on and to finish off the point that I was on a minute ago, on the top of page 3, again you get - by the way, this document is a document that was prepared for you, I guess?
Mr. Rowat: No, I think we -
Senator Kirby: You called the meeting.
Mr. Rowat: I called the meeting, but this looks as though it is a central agency minute.
Senator Kirby: That is what I thought it was. Okay. I wasn't clear whether it was just yours or whether it was - you'll notice on the top of page 3 it says, and again this gets back to the issue of whether or not on balance the package was a good package. It says:
[...] our suspicion is that developer bears little risk, but earns a high return:
And it goes on to list three or four things, but specifically some of the issues we've talked about before: government guarantees on volumes; comfortable development triggers, i.e., they had to reach certain thresholds before they had to undertake certain developments; automatic passenger facilitation charges; and so on.
So it wasn't just in May. Even by late June, people were still arguing that the proposal offered very little risk to the developer and an excessively high rate of return.
Mr. Rowat: Yes. That certainly seems to be the case from this, but let me remind you of the timing on this. This was I think the first -
Senator Kirby: This is the day before you took over.
Mr. Rowat: No, I took over on the 15th. This was June.
Senator Kirby: I thought it was the 24th you took over. Sorry.
Mr. Rowat: June 15. This I think was the first meeting of central agencies I called to see where they all were on the issue. Coming out of that, I realized there was a lot of different opinions and concluded very quickly that this is why we needed a common federal position, so that I knew I was going into a set of negotiations with the troops behind me instead of coming in at the side.
Senator Kirby: You wanted to avoid being sand bagged by your former central agency colleagues.
Mr. Rowat: I wouldn't put it quite that way, but I wanted everybody on side.
Senator Kirby: Having been in your position, I would. Mr. Chairman, I'm happy to take a supplementary. I have some other questions for Mr. Jolliffe, but I'm happy to turn the floor over to others and then take it back subsequently.
The Chairman: You only used 18 minutes of your time.
Senator Kirby: I told you I'm short winded because it's early in the morning.
Senator LeBreton: He had ten minutes last night, though.
Senator Kirby: You weren't supposed to remind him of that.
The Chairman: We're on a 30 minute limit, but that's supplementary.
Senator LeBreton: I had a supplementary on the document that Senator Kirby just referred to, Mr. Rowat. Who would have prepared that document? Was that just a speculative document, kind of the perceived problems around the people around the table?
Mr. Rowat: On June 22?
Senator LeBreton: Yes, that's right. The paragraph referred to here on page 3.
Mr. Rowat: I don't know the author of that document, but it looks like it was a minute prepared by one of the people attending the meeting.
Senator LeBreton: So this could be a view that was out there that convinced you that you had to get one common position?
Mr. Rowat: Correct.
Senator LeBreton: It might have been a view, true or untrue?
Mr. Rowat: Correct.
Senator Tkachuk: One supplementary, Mr. Chairman. There was a comment made by Senator Kirby that you forced these people to come to a common front. I'm sure Senator Kirby didn't mean that. How did you organize this? Did you force them, or did you negotiate with them?
Mr. Rowat: With my central agency colleagues?
Senator Tkachuk: Yes.
Mr. Rowat: I produced the black book using my team, sent it to them, and asked them for their comments, and indicated that this was their opportunity to provide comments because this is what we were going to use as our bottom line. And I think there was a covering memo in your documentation as to what I said to them exactly.
Senator LeBreton: It was hardly forced.
Senator Tkachuk: Fine, thanks.
Senator Gigantès: Gentlemen, I'm an admirer of the Canadian public service. It is a necessary evil, but the least evil I have encountered in 59 countries in which I have worked. I admire you.
As I understand it, you were told that the government wanted Toronto privatized. Those were your orders, and it was the government's right to give you those orders, and you saw your duty as, one, obeying the government, and two, getting the best deal possible for the public. Am I right?
Mr. Rowat: Yes. We took our directions from the government.
Senator Gigantès: But Mr. Desmarais said yesterday that at one time, and it was quoted in a document, he felt that the deal as emerging at that time was okay except that it would include higher charges for airlines and the public.
Mr. Rowat: Sorry, I didn't catch the last part.
Senator Gigantès: It would include higher charges for the airlines and the public.
Senator Jessiman: Which document is that?
Mr. Desmarais: I believe, senator, last night I said after the evaluation of the proposals we received, we recognized that the charges were higher to the public and airlines in that proposal that we were going to start negotiating.
Senator Gigantès: Okay. But everything went as best it can go in the atmosphere that prevails in such negotiations. Sand bagging was avoided by your actions, Mr. Rowat. And it all sounds as if everything was going well when you took over. But we have a memo here. The number is 00189. That's before you took over, but Mr. Jolliffe is mentioned. It is a telecon between - I don't know -
Senator Kirby: Do you have it? I think my assistant has it. Mr. Chairman, if you give me one second, I think I was going to use the same document. I think I had it duplicated.
Senator Jessiman: I haven't got it. 00189. Sorry.
Senator Gigantès: It is described at the top as a telecon between Driedger/Heed/Desmarais and Barbeau/Jolliffe, March 4, 1993, 8:30. It says:
The purpose of the conversation was to be briefed on the March 3, 1993 meeting between Paxport and the DM. The meeting was requested by Paxport to review the letter sent by the DM in response to the financing issue;
And it then says:
Paxport: Hession, Kozicz, J. Mathews.
TC: DM, Jolliffe, Green, Lelay.
So Mr. Jolliffe was there.
Keith provided these comments on the meeting.
I don't know who Keith is.
Mr. Keith Jolliffe, Financial Advisor, Air Navigation System Commercialization Project, Aviation Group, Transport Canada: Me, sir.
Senator Tkachuk: Is "DM" Deputy Minister?
Mr. Jolliffe: Yes.
Senator Gigantès: And these are the comments:
Hession was the "heavy" and Mathews seemed conciliatory; Hession stated:
- that it was a process without an end and Paxport had satisfied all of TC requirements;
- TC was using the wrong people, i.e. Deloitte Touche
- he was worried that the street talk would affect share prices as well known public companies were being associated with a stalled project;
- without an agreement to begin negotiating Paxport did not have status and therefore was not seen as being credible;
There are other pieces of information that have come before us, before you, which say that Paxport didn't have financeability, didn't have deep enough pockets for this deal.
Senator Tkachuk: Is that from the document? About the financeability? Is that from the document, senator? I can't see it here.
Senator Gigantès: No, that's from the Deloitte Touche assessment.
Senator Tkachuk: It doesn't say that in the Deloitte Touche thing either.
Senator Gigantès: Financeability, it does.
Senator Tkachuk: I have heard this going on for three and a half weeks now. I made my point yesterday. If you want to make a conclusion of fact, then you back it up. Otherwise, say it's your own opinion. It's not something we heard, and it's not something that's supported by documentation.
Senator Gigantès: We will come to the Deloitte thing tomorrow, and you will see.
Senator Tkachuk: Fine. You can quote it today. You're making the conclusion.
Senator Gigantès:
- the Hollis Harris view was different from Doug Port's view and TC should be careful who they talked to;
- unless Paxport was recognized they could not get people to come to the table;
- Paxport was ready to assume the risk of immediate investment in the Air Canada area and Air Canada's rates would be frozen for 24 months;
- Mathews stated that Air Canada's view is that they have a lease for 60 years not just until 1997;
- Hession presented the DM with a letter to sign (DM to Paxport) stating that TC officials were being directed to begin discussions on March 4.
This point I'm about to say now is my own comment. I think Mr. Hession was being pushy. You know, if I were a DM and Mr. Hession came to say that to me, I would ask him to leave the room.
- The DM did not accept the letter and said she never thought she would see the day when Hession was her executive assistant. Also TC was not "going to role over" -
There is a spelling error here. "Roll" should be with two Ls instead of O-L-E.
- Paxport should talk to Deloitte Touche on Friday, after which TC would seek direction on the project from the politicians.
Other comments on the situation:
The document doesn't indicate whether the comments were by you, Mr. Jolliffe, but it says:
- McAree -
Who is McAree?
Mr. Jolliffe: That's Mr. David McAree, who used to be one of the airport officials at Transport Canada and was at that time a consultant to the Paxport organization.
Senator Gigantès: I see.
- was chasing everyone around. He called several people trying to get info, including: Mattson, Driedger, Mattick; and Jerry Cance from Lockheed.
- ADM's view is that Shortliffe is trying to orchestrate something but not sure what.
- Lobbyists are abuzz.
- Many not-so-well-veiled threats during the meeting.
You were present, Mr. Jolliffe. Could you tell us about the not-so-veiled threats?
Mr. Jolliffe: Well, maybe, senator, I could tell you about the memo in its entirety. It is written by Tom Driedger, who is one of the airport people in Toronto. It is his note of a briefing, the first portion of which is my recollection of the comments that I made on the first page, and you're right in saying that Mr. Hession was being, in your words, pushy. He was concerned and significantly concerned because of the requirements that we had placed on his organization to provide information as to the financeability question and to deal with all of the other issues. He was concerned that we were taking a particular point of view to obtain information, and Mr. Paul Stehelin will presumably attest to the lengths that he had to go to to obtain information to do his job.
Senator Gigantès: Obtain information from whom?
Mr. Jolliffe: From the consortium, from the Paxport consortium. The point about -
Senator Gigantès: Are you suggesting that the consortium was being unforthcoming with information?
Mr. Jolliffe: No, sir. The consortium contained both public and private institutions, and therefore there was a concern about how information would be released and how it would in fact be prepared for that release. That's the point that is made about the well-known public companies being associated with the deal. Obviously publicly traded companies obviously have to be considered under the stock exchange rules as to information that might go to their own performance.
The point about Mr. Harris's view is different from Doug Port's view, that's entirely Mr. Hession's opinion that is being recorded.
And unless Paxport was recognized, and that's again Mr. Hession's problem of not being able to be recognized as being in negotiations with the government, and therefore Air Canada was not prepared to recognize them as having substance and to enter into discussions with them.
Senator Gigantès: Which, I mean, it sounds to me that Mr. Hession did not have substance if he needed to be recognized in order for others to think that he did have substance.
Mr. Jolliffe: Well, senator, I think Mr. Hession was looking for some document to say that we were now entering into negotiations with the Paxport consortium. That document came out much later. I don't remember the date, but much later after we had dealt with the financeability question.
Senator Gigantès: Might I interrupt here and take you to the last page of the document, the last but one paragraph which says:
Catch 22: TC will not start negotiations until Paxport has demonstrated its ability to finance the project and Paxport cannot get financing until they have credibility gained through starting the negotiations;
It does sound as if Paxport did not have substance of its own.
Mr. Jolliffe: I think these comments, senator, on this page - they are not my comments, they are Mr. Driedger's comments, but I think they are from a number of people. I think that comment was Mr. Hession's comment, that he thought that he was in a Catch 22 situation.
Senator Gigantès: He did. So it doesn't sound as if at this particular stage Paxport and Mr. Hession were people to whom Toronto airport could be given without raising certain apprehensions among others. Without raising doubts, for instance, in the mind of Air Canada, which was not too anxious about all this.
In other words, you were given the difficult task of preparing and negotiating a transfer deal, a privatization deal, with a group that did not have the necessary deep pockets, the necessary substance, and wanted a kind of blessing, a chrism, an official chrism so they could then go and flog this recognition and get some money. It doesn't sound like the ideal partner to pick.
Mr. Jolliffe: Senator, at this point in time, you recognize that the Mergeco organization was being dealt with. There were discussions going on between the two parties, between the ATDG and the Paxport group. Mr. Hession, who had led the Paxport arrangements up to that time, was at this meeting joined by Mr. Jack Matthews, the son of Mr. Don Matthews. Mr. Jack Matthews was taking a more predominant part in the negotiations. And Mr. Hession, I believe, moved afterwards to then deal with the international aspects of what they expected to be the final outcome of their proposal.
So I think that Mr. Hession was laying the ground rules for what was yet to come, still trying to preserve their position with their proposal, but when the two parties came together, of course, the deal was that we would only negotiate on the basis of the Paxport bid, and which is exactly what we did, but Mergeco was in the background of this, so, you know, the financeability question was being solved by the deep pockets, as we called it, being brought from the other sides.
Senator Gigantès: Which brings one to question why Paxport was picked in order to move down from what Paxport was saying towards what the other bidder -
Mr. Jolliffe: Essentially this was a real estate deal, senator, and we were dealing with the highest offer that we had.
Senator Gigantès: Highest offer by someone who didn't have the wherewithal.
Mr. Jolliffe: Recognizing that we had to deal with the financeability question, which was then solved by the Mergeco arrangement.
Senator Gigantès: By giving the deal to the number two, in effect.
Mr. Jolliffe: By negotiating the deal.
Senator Gigantès: It sounds to an outsider, who is not a deal maker, as a weird procedure. You declare that the best deal is made by somebody who doesn't have the finances to put it through, and then -
Senator Jessiman: That's not what he said.
Senator Gigantès: No, that's not what it said, but they did declare that Paxport was the best bid. But they didn't openly declare that Paxport had empty pockets.
Senator Jessiman: That's not true. It's not true. It's the airlines that have the empty pockets.
Senator Gigantès: Please.
Senator Jessiman: It's the airlines.
Senator Gigantès: Why is the financeability problem called Paxport's financeability problem?
Senator Jessiman: Of the project.
Mr. Jolliffe: I think, senator, the financeability question is one of the degrees to which the equity to be brought by the consortium members was hard or soft, and the concern was whether the equity would be there when it had to be brought to the table. And that was at the closing of any deal. This is a project financing arrangement. No one could expect someone to arrive with $850 million up front to finance construction going out over eight years, but the equity that was there to be put into the project had to be there on closing, and it was there on closing.
Senator Gigantès: It was there on closing because the number two, in effect, got the deal, because they became the major shareholders of the Mergeco.
Mr. Jolliffe: The Pearson Development Corporation, which included both of the proponents, put together the equity on closing. The percentages changed.
Senator Gigantès: You seem to resist saying that, in effect, it was because the number two people, the Bronfmans, came in and in effect got control of the situation.
Mr. Jolliffe: I am not resisting saying that, senator. That is absolutely correct. The Bronfman money brought to the table changed the percentage interests between the two parties such that the balance was moved from the Paxport side, if you want to go back to the original, to the ATDG side, but it was Pearson Development Corporation, an interest of both parties, joined and agreed to by both parties, consciously understanding what they were getting into, and preparing to negotiate with the Crown on the basis of the Paxport proposal.
Senator Gigantès: I have no doubt about this at all, but what you say does not dissipate the impression, to me inevitable, that there was a great effort to accommodate Paxport at the beginning and if possible give it to them even though the other bidder was better qualified. You could have negotiated with the other bidder.
Senator Tkachuk: But they lost the proposal call.
Senator Gigantès: Look. You make a proposal in which you promise things you cannot deliver.
The Chairman: Let the witness answer, please.
Senator Gigantès: They could not deliver. They had to go to the Bronfmans in order to be able to deliver the financeability. So why was the Paxport proposal - this idea that they produced the more acceptable proposal sounds bizarre. It's as if somebody said to me, "I can give you a better deal that someone else. I can sell you a better car than someone else," and he doesn't have the car to sell me.
Mr. Jolliffe: The better car had all of the better attributes, all of the better options, the better engine, if you want to keep the analogy going. The building was better.
Senator Gigantès: This car salesman didn't own the car, didn't have it. So you accept a mythical car.
Mr. Jolliffe: We were accepting, senator, that the proponent has put forward a set of projections which one has to test, and we tested that in the evaluation stage, and we believed that that was the better of the two proposals to start with. We then asked for the financeability question to be settled, and if that had been settled satisfactorily without Mergeco coming forward, we would have continued with the Paxport consortium as it was.
The project financing is the important part of this, that what we were looking for was staged development of the airport which would have to be financed out of airline revenues, concession revenues, and borrowing, and to get the borrowing, the consortium had to show that it had sufficient equity and could create a sufficient cash flow to bay pack the debt and to cover the debt servicing costs. And all of their projections showed they could do that with the exception that we had the concern about the high level of revenues that would have been charged to the users. And as you have heard -
Senator Gigantès: Forty-two per cent - right? - is what they were asking, I read somewhere.
Mr. Jolliffe: I think you're comparing a different statement. The management fee, which is a different issue.
Senator Gigantès: Which is exorbitant, 42 per cent.
Mr. Jolliffe: The management fee of 42 per cent was I think a very poor choice of comparisons, because it compared a management fee to a single component of total overhead, which was direct labour. If that management fee had been compared to all of the operating and maintenance costs over which management has to manage, it would have been about 10 per cent and which we deemed to be well within the range of acceptable overhead management fees.
Senator Gigantès: But the fact remains that you went to Paxport to buy this car with much better options when they didn't have the car and didn't have the money to buy the car to deliver it to you. This is what it sounds like to a non-negotiator.
Mr. Jolliffe: What they had, senator, was an opportunity to lease two terminals from the Crown at Pearson and to develop them according to their proposal, which would require them to have a deal with the airlines for certain rates and fees and charges to be charged back to those airlines as a consequence of the development that would be done for those airlines. They had the opportunity to receive revenues from concessionaires who then had an opportunity in partnership with Paxport to improve the concessionaire activity at the airport. They had an opportunity to use that leverage to produce a cash flow to pay back lenders who would look at the deal when the deal was on the table and decide the degree to which they would finance that.
And the staging of that financing was critical because we needed to see that the development would be continuous. We didn't want a stop-and-go development. So it was very important that the development continue and that the financing come along with that development. That meant that the whole process by which cash flow would be there had to be understood by the financier so that the debt would be available.
Senator Gigantès: So it was a question of taking a firm, choosing a firm that was in itself not recognized for its financeability, giving it the contract so it could then go and peddle it and try and get people to lend it money and -
Mr. Jolliffe: No, senator.
Senator Gigantès: A very "iffy" situation, which Transport found "iffy" because you forced them to go into an agreement. I have here -
Senator Tkachuk: What are you saying, senator? It was deliberately a sham by Paxport? They deliberately did this? You're making accusations here about companies that are involved on the stock exchange like agri industries and engineering firms and other people. Paxport is not Matthews' corporation only. It is a number of firms, and I want to know what you're trying to say here.
Senator Gigantès: What I am trying to say here is that it was a wrong choice, Paxport, because it did not have the financeability.
Senator Tkachuk: Your opinion. That's all.
Senator Gigantès: Yes.
Senator Tkachuk: Okay. Fine.
Senator Gigantès: But it also was, according to Mr. Hession's testimony transcript, Wednesday, August 2, 1995, and I read from that: We are told about the Mergeco origins. We were told by Mr. Hession that three to four days after the government announced that the Paxport proposal was the best overall acceptable proposal, he received a telephone call from a senior Transport Canada official who suggested that Paxport explore the synergies - I love that word - of a merger with the other proponent, Claridge. So Senator Bryden asks:
Who approached who?
I would prefer "whom".
Did Paxport approach Claridge, or did Claridge approach Paxport?
Mr. Hession: No. Neither. Neither. A senior official from Transport Canada approached me and suggested that we should explore the synergies with the Terminal 3 owners.
Transcript, Wednesday August 2, 1995, 0945-33. Senator Bryden then asks:
Whoever that person was, to try to get back to the question that you answered, that you were advised or the parties - you were advised by neither - it was neither Paxport nor Claridge, but someone in government said the parties should get together?
Mr. Hession: A senior official in Transport Canada is what I said.
Senator Bryden: And about when did that happen?
Mr. Hession: Oh, within two or three days of the announcement of the award.
I think later that week is my recollection.
That's from the transcript, Wednesday, August 2, 1995, 0945-36.
It does sound as if that senior official in Transport and presumably others felt that Paxport couldn't manage, and in order to salvage the deal, it was better to get them to merge with Claridge so that there would be something more, there would be an entity more worthy, more financially sound, with which to go through with this deal so as not to have a stop and start and deep pockets. The question comes back again, why pick for the deal somebody who didn't have them, because somebody from Transport asked him to go and merge with the second one. Why give it to the first, to Paxport, simply because what? What did Paxport have? He produced a proposal, which he could not back financially himself, Paxport did, and then Transport officials, bless them, said, "Hey, you can't do it. Go and join with Claridge."
Do you doubt what Mr. Hession said about a Transport official giving them that advice? I think you did well. Whoever the transport official was, he was saving the public.
Mr. Jolliffe: Senator, I have no knowledge of who that transport official is, if it was a Transport Canada official. It certainly wasn't me. I knew of the Mergeco arrangement, as I testified yesterday, around January 18.
But I think the issue is one of progression here, and we've progressed through an evaluation of proposals to a position where we needed to have some other information, and that information was around the soft equity of one of the proponents in the Paxport consortium.
Senator Gigantès: I love those words, "soft equity".
Mr. Jolliffe: There was certain so-called street talk that perhaps the Matthews group was in some difficulty and may not be able to bring their proportion of the equity to the table at the appropriate time. Where that came from, I have no idea. How the issue of looking into that financeability question came to be front and centre, I have no idea. It was an action that we had to take. We had to investigate the financeability. So then we worked through together with Deloitte and Touche to do that, and maybe Mr. Stehelin tomorrow can answer to how he did that and what he found, which I think you would find another part of this jigsaw puzzle that we are putting together.
Senator Hervieux-Payette: Just a question of clarification on this. I am wondering, I mean, I think we are all puzzled by the one portion of the process is that you award the contract to one saying that's the best overall.
Mr. Jolliffe: No, senator, we did not award a contract.
Senator Hervieux-Payette: You said it was the best overall proposal.
Mr. Jolliffe: Correct.
Senator Hervieux-Payette: Okay. Well, when usually in my past experience with SNC, when you are going to the table to resolve the few things that not sometimes have to be clarified, usually the main point of the proposal, you finish with them. Otherwise you don't negotiate. I mean, why did you backtrack on many of the financial issues from the original proposal of Paxport to sign with Mergeco?
Because as far as I'm concerned, this should have - you were supposed to be there to, I would say, finalize the nitty-gritty and the conditions that were not met, but not to review the whole proposal from Paxport. The original Paxport proposal, in order to go ahead and sign with Mergeco, you should have adopted the whole Mergeco financial package, and then of course finalize the few things.
But otherwise, I don't see how the government in other contracts and other requests for proposals, if every time everybody making a bid could change some of the conditions, major conditions of the request for proposal, I think it would be chaos in the Canadian government. Because we go on the market with RFP through the Department of Public Works all year around. And it's a very strict procedure. And once you don't apply what was in the RFP and the person replied and complied with the RFP, this is supposed to be part of the final contract.
The little things that you have to finalize and conditions that were not necessarily met because, I mean, sometimes it's because it's not clear in the RFP and you don't have all the information, well, you finalize that. But the main core of the proposal normally, I have seen it, it's always there. Otherwise there is no contract.
Mr. Jolliffe: I wish, senator, it had been as simple as you make it out. It was a very complex set of documents that we received from both proponents. And as we testified yesterday, both of them had conditions that we found in part unacceptable or that we knew that we would - if we wanted that type of point of view to hold, that we would have to negotiate with them to obtain what we also wanted out of that offer that was being made to us. It was an offer with some conditions. We couldn't - it would be beautiful if we could just say, "Well, fine, that's it, there isn't a thing to worry about, sign here." It wasn't like that with either Paxport or ATDG's proposal. So we started with the highest and best and worked around that proposal.
Senator Hervieux-Payette: Am I right in saying that normally, under government procedure, when you make a proposal after replying to RFP, you have to stick to your proposal and have the conditions that you have laid on the table, like, you know, the great return to the Crown on the - they were the major points why the award of the contract was given to them. And then you backtrack with Mergeco, because of course we know that the Claridge proposal was not as generous. You say, "Well, we did well because we have a little bit more than Paxport." The little bit more than Paxport, as far as I'm concerned, I mean, is why would the original proposal from Paxport, if it was the best deal that the government should have made, why wouldn't you stick to these financial conditions?
Mr. Rowat: Senator, the best overall proposal was declared the best overall proposal because it had a number of attributes, and those attributes were laid out according to certain percentages in the overall review process that has been described to you. Out of all of those components, there was one big component, and that is the return to the government. I am not taking away from the others, but that was one big issue.
The government, in all of its contracts, after declaring the best overall proposal, then outlines to them the pieces of that winning proposal that the government feels should be renegotiated, the largest pieces of it. That is what was identified in Victor Barbeau's letter back to the company, including the financeability issue, which was based on whether the airports could afford the deal, the financeability, whether they could afford it. So that it was recognized in December when Victor wrote that letter that, in essence, the financeability issue, the viability of this proposal to the airports would be one of the issues that we were going to, as a federal government, renegotiate. And I think as some of my colleagues have indicated, that was something that was going to have to be modified, and in the final analysis it was.
Senator Hervieux-Payette: I just want to compare my notes with Senator Gigantès, because I had the impression that once you are at the negotiating table with the best overall proposal - which is what the request for proposal did for them is to bring them to the table to negotiate with you. And once they were there at the table, the government at the time, even though there was a commitment to a certain amount, and there are so many billions - I'm not going to mention the billions because, I mean, I'm going to mix up the amounts of money, but I mean, I know that the Paxport proposal was the most generous.
And you make it sound as if the government agreed to bring it down to a lower level, even though you had qualified this group, and I am not talking about the financial viability of Paxport. You had qualified this group as having made the best proposal because they had the most, the biggest amount of money on the table.
Senator Jessiman: No, no.
Senator Hervieux-Payette: This was one of the major core. You allowed them 45 per cent of the points on the -
Senator Tkachuk: Are you a witness?
Senator Hervieux-Payette: I am sorry, but I am trying to understand. If they want to correct me, they will. I think they are there for that. So let me finish.
Senator Tkachuk: Ask a question. If you're going to be making a long series of speeches here -
Senator Hervieux-Payette: I'm sorry, I don't need instruction from you. I'm trying to understand -
The Chairman: Order. Order. Order.
Senator Tkachuk: I am trying to understand -
Senator Gigantès: All this is on my time, Mr. Chairman.
The Chairman: Just a second. Mr. Rowat -
Senator Tkachuk: We have witnesses here, and these witnesses are attempting to answer question that we have. We are making assumptions in questioning the witnesses which are based on the views of certain senators, and speeches are being made here, most of which I don't personally agree with, and it doesn't matter. But we haven't heard testimony to most of the things that she has claimed to say in the previous speech. So if the witnesses are here, I would ask you, senator, to ask them the question. If you're the expert, you go up there and we'll ask you the questions.
The Chairman: Order. Order. Mr. Rowat, I hate to put the three of you to do this again from memory, because that's not why you're here, but could one of you take - Senator Gigantès would be interested in knowing, because he wasn't here at the time, but can you explain the evaluation process headed by Mr. Lane and the five - I think it was five - points and the way in which they arrived at the best overall proposal? And then the following letter from Mr. Barbeau almost immediately following in which he said, "Now, congratulations, you have the best overall proposal because you won four out of the five main points, et cetera, et cetera, et cetera. What we want now is further information." Can you take Senator Gigantès through that?
Senator Gigantès: I read the transcript, Mr. Chairman.
The Chairman: I would like to hear this again just to be clear. I think it's needed.
Mr. Desmarais: I will try, senator. This is straight from memory. The RFP was written, and it had certain criteria in it that the RFP would be evaluated against.
Mr. Lane was tasked with setting up a committee to review the RFP, and it was broken into five parts. I believe the five parts were proponent qualifications, business plan, development, operations, and employee transfers, if I can call it that. Each of those groups was headed up by a chairman, if you like, and those chairmen formed a separate committee called an evaluation committee, and these chairmen chaired the evaluation subcommittees.
Those chairmen, in the case of the development plan, were two civil servants; in the case of - sorry, in the case of the business plan were two civil servants; in the case of employee transfer it was two civil servants; in the proponent qualification it was a consultant plus Mr. Lane; in the case of development, it was co-chaired by a consultant, a doctor from the University of Toronto whose name is Gerry Stewart from the University of Toronto and a Mr. Ross Douglas who was also a consultant and a former employee of Transport Canada, Airports Group. And the operations committee was co-chaired by a civil servant who is the director of operations out of the Pacific region and also by a consultant who is a former Air Canada employee.
They all set up various evaluation criteria based on the criteria that were presented in the RFP, and those were established before we received the bids. These are the work booklet, if you like, that Mr. Lane explained to everybody. Those booklets were used in the valuations by various members of these valuation subcommittees. I was on one subcommittee; Mr. Jolliffe co-chaired the business plan subcommittee.
We all did our work. We presented our reports to the co-chairmen, who subsequently took these reports of the subcommittees to the main committee which was chaired by Mr. Lane. That committee wrote the final evaluation report. I believe Mr. Lane said the other day he achieved consensus, an agreement from everybody on that committee, as to the wording of the final report. And that was the report that was eventually presented to the minister.
While all this was going on, the auditing firm of Raymond, Chabot, Martin, Paré was undertaking an audit. I have avoided "RCMP" this time, senator.
Senator Kirby: Thank you.
The Chairman: And the monitoring.
Mr. Desmarais: They did the auditing and monitoring of the process. This whole processing was being controlled by Price Waterhouse in terms of security, if you like, of information and how questions were being formulated to be asked of the proponents if there were questions to be asked and so on. So that is basically the idea of what went through that evaluation committee.
The Chairman: I think Senator Hervieux-Payette was questioning why it was necessary, then, for Mr. Barbeau to write the letter the following day or some days shortly thereafter. He asked for -
Mr. Desmarais: Each of the subcommittees, as I indicated before, wrote a report and compared the two proposals as against each other and as against the criteria. And as against the criteria, they found deficiencies in both proposals. Deficiencies were listed in those subcommittee reports as to what would have to be negotiated if this proposal was accepted. And then they scored them relative to each other and as against the criteria and came to the conclusion at the end of the day that Paxport had the higher points.
And I believe they had higher points in not only the business plan, but also the development plan, the operational plan. And I am not sure about the qualifications part. I think they were a little bit lower on qualifications. And I think the employee transfer plan was fairly close. They were relatively close to each other.
So on the three main issues, if you like, the business plan, development plan, and operational plan, which made up the bulk of the scoring - the other two plans were probably in the order of 15 to 20 per cent, but 80 per cent of the scoring - Paxport scored the highest in those three plans.
So when I said yesterday that we wanted the Paxport proposal, I wasn't necessarily speaking about the financing. They had a better operational plan for what they were proposing, and they proposed a better development. That is one of the things we were looking for in this, was redevelopment of the terminals.
The Chairman: Did you want to follow up on that, Senator Hervieux-Payette?
Senator Gigantès: I want to follow up.
Senator Hervieux-Payette: That's okay.
Senator Jessiman: Can I ask one small question, a short question? I don't think you mentioned that the development plan evaluation committee was advised by an independent architectural and engineering consultant, nor that the business plan evaluation committee was being advised by a financial consultant. In the first case, the engineer being Bob Row Eldridge and Consultants and Bob Row Architects, and the financial consultant was Richardson Greenshields. Is that correct?
Mr. Desmarais: Yes, senator, that is correct. I omitted those.
Senator Jessiman: I just wanted that on the record.
Senator LeBreton: We have this in the books. You don't.
Senator Gigantès: Mr. Chairman, I will finish in about five minutes, at most. Maybe less.
Did the firms making submissions know on what they would be evaluated and which things counted most?
Mr. Desmarais: They didn't know the scoring system, senator, but they knew what the major criteria against which they would be evaluated. That was in the RFP.
Senator Gigantès: Okay. So it would seem to the ordinary citizen that if you have two firms submitting and you find that one of them, according to your scores, has made quote the best proposal unquote but doesn't have the financeability, and the other firm has the financeability and has the second best proposal, you go to the other firm and negotiate to improve from your point of view what they are offering you, and you do not go with the person that doesn't have the financeability.
Mr. Desmarais: Excuse me, senator.
Senator Gigantès: Excuse me. It sounds as if I came, I the client, that is, the government, and said I want a world-class car, and a car salesman comes around and says, "I'll give you a world-class car with all these options," only he doesn't have the car and he doesn't have money to buy it. Come someone else who offers fewer options but who does have the car and has the money, and yet you pick the one who doesn't have the money. To me, it sounds a strange way of proceeding.
But you got the country and your political masters out of that bind because an official from Transport Canada told Paxport to merge with the number two who could deliver. So in order to do Mr. Matthews a favour so that he could get a piece of the pie, there we are, we get the merger. He doesn't get it all, but at least he gets something. That's what it looks like to an outsider looking at this.
Mr. Chairman, I am through. It was a statement on the question.
The Chairman: Do you agree with that characterization, gentlemen?
Mr. Rowat: I wanted to use his own analogy with respect to a car. I think it will help Senator Payette as well. In essence, the government went out looking with a tender for cars. We got two proposals back, one for this car, one for this car. We assessed our needs between the two, said this one has a very powerful engine. I like that. It's the kind of engine I would like to have in a car. But on the whole, the other car suits our needs best. Tall guy, I need leg room, big trunk space, so on and so forth. That's the car. That's the body I want to go with.
Senator Gigantès: No engine.
Mr. Rowat: You declare that car is the best one to suit our needs.
Senator Gigantès: It has no engine, though.
Mr. Rowat: It has an engine, but it could be an under-powered engine. If you look at the debt equity ratio, it has an under-powered engine, but over all, that automobile suits our requirements best. So.
Senator Gigantès: It has trunk space but no engine.
The Chairman: Let him answer. Order.
Mr. Rowat: Hold on. So the government then - what I was trying to explain earlier, the government then goes back, as Victor did with the letter, to say, "Look, we like your overall proposal, but there are elements of it which are going to have to be fixed. We want a new set of tires, we want you to repair the hole in the rocker panels, and the engine is under-powered." So what -
Senator Gigantès: If there is an engine. There was a doubt about the engine, financial engine.
Mr. Rowat: In any event, you go back and identify what the requirements are going to be. It's as simple as that, and that is in essence what took place.
Senator Gigantès: But in effect, you went with the other car because of its engine. You forced him to take his fancy options and the rocker panels, the repaired rocker panels, and put it on the chassis of the other proposal with the engine and the electrical system that worked, et cetera. Thank you.
Mr. Rowat: No, I think we bought this car.
Senator Gigantès: Well, I don't think the car analogy works in your favour, sir, but thank you for cooperating.
Senator Kirby: Do you know anything about buying a car, Senator Gigantès?
Senator Gigantès: That's why I used it.
Senator Kirby: Mr. Chairman, I just have a couple of documents for Mr. Jolliffe, and looking at my assistant there, my letters are C, D and E, if you could give all three of them out. Can we wait one minute. I duplicated a copy for you people too. The first one, just for the record, is document 002065.
While that's being given to you, Mr. Jolliffe, the document is signed by someone called Mara Lee McLaren, which is a name that hasn't appeared before this group before. Who is she?
Mr. Jolliffe: Dr. McLaren is one of our staunchest resource persons and is in the room at the moment sitting over there.
Senator Kirby: Fine. It's a name that had not appeared before us before.
I just have one question, which I want to make sure I understood something. This is a document - sorry, I guess it was actually to Mr. Desmarais, excuse me. Mr. Desmarais, I really only have one question. You see in the first - on this document, in the first page, in that long paragraph that begins, "The main issue is the difficulty", in the middle of that, it refers to the MOU. Is the MOU what we have in this hearing been periodically calling the guiding principles? It's the memorandum of understanding, which is what MOU stands for, covering the guiding principles? It makes sense to me in that context.
Mr. Desmarais: It may well be, senator. I would have to ask Dr. McLaren what she actually meant. I can do that if you gave me a couple minutes.
Senator Kirby: All right. I didn't have any detailed questions except -
Mr. Desmarais: I believe it was probably the guiding principles.
Senator Kirby: Can I then ask you to turn to the last paragraph on that document, which is on - yours is two-sided photocopy. Okay. The last paragraph reads as follows:
Another problem is that the value of the offer to the crown may slowly erode when, as the negotiations progress, to the point that there may no longer be much difference in the two offers. At that point, what would happen? While it isn't a negotiating issue per se, it could well affect the negotiations.
In a sense, isn't this what happened?
Mr. Desmarais: We were aware of the problem, senator, that the deal could slowly erode to the point where it was - the financial offer would have ended up being the same as the ATDG offer.
Senator Kirby: Or very close.
Mr. Desmarais: Or very close, and that was one of concerns we had. As Mr. Jolliffe said yesterday, we knew we were on a slippery slope, if you like, when we started negotiating things with the airlines and so on, and it would start going down. And we were very concerned that we didn't get to that point. And I would think in the final deal, we were still well above the original ATDG offer.
Senator Kirby: You came down some 400 million roughly, is that right? You came down about 33 per cent from the -
Mr. Desmarais: We came down from 1.2 billion, if you like, to 843 million.
Senator Kirby: Roughly a third.
Mr. Desmarais: We were still above the ATDG offer which was 642 million. And a lot of that erosion, if you like, took place because of the changes to the airline agreements. I mean, when they originally set out in their proposal airline rents, those rents were to be capitalized at roughly 12 per cent. I think we were down around 10 per cent in the final deal. And this was a based on a percentage rent formula when we got to these numbers. The Crown was getting something like 40.5 per cent of the gross revenue at this point. And so when you reduce the gross revenue charging to the airlines, you do get some erosion.
Senator Kirby: Absolutely. Okay. You might just tell me after, just for my own information, if the MOU is what you and I both think it is.
The second document I gave you is a document that is called "Blue Sky Thinking", and I guess -
Senator Jessiman: Number?
Senator Kirby: It was just passed out. It is 002077, which is a document presumably written by Mr. Jolliffe. I say that only because in the upper left-hand corner it says, "Keith, good note", so I assume you wrote it. Is that correct?
Mr. Jolliffe: That's correct.
Senator Kirby: By the way, just as an aside, who did you write it to and whose handwriting is that? Because there are comments all the way through it. Whose notes are those?
Mr. Jolliffe: I think they are my notes, and I wrote them to Mr. Rowat.
Senator Kirby: That is Mr. Rowat's -
Mr. Rowat: It looks like my handwriting.
Senator Kirby: May I congratulate you. It's remarkably legible.
Mr. Rowat: On some occasions.
Senator Kirby: That I understand. I wonder if I could just ask Mr. Jolliffe - and Mr. Rowat, chime in if you'd like to - some comments on the document.
On the bottom - first of all, this document was written on June 24, about a week or so, or ten days or so, after Mr. Rowat became the chief negotiator. Right?
On the bottom of the first page, you say:
The responses to the RFP addressed these objectives -
You have listed the objectives of the negotiations.
- however, the government does not have an adequate measure by which it could be satisfied that any deal resulting from the current negotiations is acceptable.
I understand what the statement means. Was an adequate way of measuring whether or not a deal was acceptable ever developed? I mean, an objective way? Or was it just a gut feel on the package?
Mr. Jolliffe: It was in that the RFP set out certain criteria to be met by the respondents, and the whole intent of this document was to go through the major objectives of the RFP for Mr. Rowat's ...
Mr. Rowat: Education.
Mr. Jolliffe: Education and to relate it back to those objectives as a means of stepping back from where we were so that we could look at where we were going, so that we could in fact do what we did, which was to set out the black books and all of the principles on which we would go forward with negotiations. It was relating it right back to the basic objectives in the RFP. It was my reality check. It was "Blue Sky Thinking" because I didn't want any clouds around this thing at all. I wanted to be directly objective in looking at what we were trying to deal with.
Senator Kirby: Okay. That is what I thought. Then let's go through your reality check.
On page 2, your second objective is private sector design, construct and finance. And your last two paragraphs on that topic say as follows:
Within indemnification for Bitove to 1999, the Diversion clause and compensation, the government is agreeing to underwrite private sector risk taking.
What then for the objectives of private sector solutions to public infrastructure problems?
As I read that, you were clearly having some doubts about whether the objective of private sector design, construct and finance was being met.
Mr. Jolliffe: Not at all, senator. My point there was that I thought that we really needed to look critically at how or whether one would indemnify Bitove, how or whether one would deal with a diversion clause and the compensation if there was to be any for that, how we would in fact deal with the rest of the deal so that what was sought by the minister in his letter, which was the creativity and ingenuity and inventiveness of the private sector, would in fact be seen in the final deal.
It wasn't a question that the private sector solution to this was a question. That was the direction the government gave us.
Senator Kirby: What about your previous -
Mr. Rowat: Just a further comment on that. You know the outcome on the diversion clause. There was in the final analysis, no indemnification of Bitove.
Senator Kirby: Why as late June were you saying, Mr. Jolliffe, the government is agreeing to undertake private sector risk taking?
Mr. Jolliffe: I said with those things - my point was that if we were to do indemnification, if we were to give compensation with a diversion clause, we would in fact be then underriding the private sector risk taking. In fact, we would agree to something which one would expect the private sector to take some risk on.
Senator Kirby: So of those items, the Bitove indemnification and the diversion clause, you agreed to one but not the other; am I right?
Mr. Rowat: Correct.
Senator Jessiman: With reduced numbers.
Mr. Desmarais: Not quite. The diversion clause at this time was basically the 33 million with compensation, but the other side was asking for access to area 4 as part of that. They wanted area 4, and we did the tradeoff that we could get rid of the diversion clause with area 4 later in July. So we moved off of the diversion clause, as it was known at this time, to something that was more manageable for the government.
Senator Kirby: On the next page in your objective on the middle, which is to "ensure the effective integration of Terminal and Airport operations," you say again in your last line on that one:
It remains to be seen whether airline passenger needs are met.
What did you mean by that? I'm talking about your middle objective.
Mr. Jolliffe: Yes. I'm just trying to read my own words.
Senator Kirby: Sorry. This is one case where I did have some trouble with Mr. Rowat's writing, which I assume is his writing. In any event, I wasn't seeking to read the writing. I was just trying to understand. You say:
It remains to be seen whether airline and passenger needs are met.
Mr. Jolliffe: I think at that point in time what I was trying to bring out was that we still had to have the development agreement worked out, exactly how that would come forward, how the passengers would be able to move through the terminals. The inter-terminal connections was one of the things that they had to bring forward. The other part of that, of course, was the cost of that.
Senator Kirby: When the Mergeco deal came forward - so all three terminals were owned by essentially the same company. Did you think that there were either synergies from an operational standpoint or advantages to passengers of having that arrangement?
Mr. Jolliffe: Yes, I thought there were synergies and I thought there were benefits to passengers.
Senator Kirby: Then why do you say in the first paragraph in that section that "no real linkages or synergies are apparent"?
Mr. Jolliffe: At that time we had very little knowledge as to how they would be working together.
Senator Kirby: So you're saying that between June 24th and the end of the negotiations, you, even though there had been almost six months or five months of Mergeco having been together, as late as the end of June, you did not see linkages and synergies, but you suddenly saw them in the last three months?
Mr. Jolliffe: No, I think that became clearer for us. We had Terminal 3 under a separate lease arrangement, which produced a different return to the Crown than the T1T2 leases. There has to be a managerial decision as to how the airport is operated with three terminal operations and how traffic is directed between those terminals. That had to be reviewed, but apart from that - this was some while ago now, so I really can't think of any other objectives that were in my mind in making that statement.
Senator Kirby: In the last objective on that page, you talk about "an appropriate financial return for the Crown...", and you say:
The government has not settled on exactly what is the bottom line in addressing this objective.
This was late June.
I guess this is a question basically for Mr. Rowat. Did the government ever decide at what point it would walk away from the table? I mean how low was too low?
Mr. Rowat: As I said yesterday, we followed due process on this. The criteria that was set was to be better than the next best alternatives. So I think that is one comment I can read of my own writing, "Should be opportunities cost/profit of doing it ourselves" in terms of what are the weigh-offs. That's what we compared it against eventually was the revised base case model. If it came out that this was better than the base case model, then that would be the bottom line.
Senator Kirby: And that comparison is the revised base case model comparison in the document that Mr. Desmarais referred -
Mr. Rowat: Mr. Desmarais -
Senator Kirby: No, Mr. Desmarais referred to a different document last night. I know the one you're talking about.
Mr. Desmarais: Senator, we are referring to base cases that were done all through July and August, if you like.
Senator Kirby: The base case kept changing?
Mr. Desmarais: Yes, and the conditions and assumptions kept changing in it as well. I think the best summary of it - we were looking at them last night and early this morning. They are just a lot of computer printouts with tables, and the best summary of it is in that November 4th briefing note. If we can get to that at some stage, we can take you through what the base cases said at the point when the deal was done.
Senator Gigantès: The base case, as you explained it, was continuing public management of the airport, right?
Mr. Desmarais: That's correct, senator.
Senator Gigantès: Why did the assumptions keep changing within so brief a period of time?
Mr. Desmarais: I said we ran the base case under several assumptions. The things we were changing were things like revenue. How much revenue or what was the revenue expectation of the Crown? Yesterday, we looked at 1 per cent real as one assumption that the Crown could make that we could get this. The note was that that was optimistic. We also ran it at 10 per cent real and also at zero per cent. We were looking at our various assumptions in that base case to see what really was reality and what we would have to do to match the offer we were getting from Mergeco, so that's why assumptions change.
Senator Gigantès: Excuse me. You have an offer that's coming from Mergeco, and you want to compare it with a base case, which is continued management by the government. You describe that as "reality", but you keep changing the basic assumptions on which you describe this reality.
Mr. Desmarais: Yes, senator, I do.
Senator Gigantès: It sounds as if - you know, if I didn't know the public service and I didn't love it as I do, it sounds as if the assumptions are being changed to reach something that would sound suitable rather than real.
Mr. Rowat: Senator, the way that we were modifying the model was as simple as this. The base case generated - our base case, the Crown's contract, generated an overall return to government - under the conditions 8.5 per cent at present value over 57 years - of 595 million under the base case. Theirs came in at 843 million, and it changed on a couple of occasions - 809, 843. At 843, we said what would we have to do in the base case model in terms of revenues to generate a revenue to the government equivalent to that? So let's go back and change our model and see what kind of revenues we would have to generate to equate to the 840 they have suggested to us.
So we said let's see if it would take 3 per cent per year in terms of revenues. No, it's going to take more than that. Let's try it at 5 per cent. We tried it at 5 per cent. It would take more than that. We tried it at 7. We tried it at 10.
We found out that we would have to - the federal government, if it were operating the airport, would have to have growth in revenues of 10 per cent a year to get the equivalent of what Mergeco was providing, the 843. So that's what we were - we were doing a sensitivity test to see what we would have to do.
We then asked ourselves, is it possible that the government could actually see growth and revenues of 10 per cent based on the historical management experience that we've had? We went back and checked the record, and on no occasion, I think the advice was - and I may be wrong on this - but on no occasion had the government ever exceeded the rate of inflation. In other words, it was always less than 3 per cent. So I think it's a pretty realistic assumption to say that the government was not going to get into the range of 10 per cent after having been in the range of 1 to 3 per cent and probably less.
Senator Gigantès: Did it ever occur to you that the revenue targets that you were being promised in this deal, in view of what you were finding out through these tests you were doing, might be unrealistic and that it would turn out that the contractual party would not be able to pay the government what it promised? Because you've just done tests in which the reality showed it couldn't be done.
Mr. Rowat: This is where I described earlier that we had outside financial advice as well as internal financial advice that indicated that the returns that they were proposing were roughly within the range that could be expected. So it wasn't based on our own internal assessment. It was based on Stehelin, who you will hear tomorrow from Deloitte Touche, that the private sector could achieve that kind of a return.
Overall, I mean if there's an assessment as to whether the government or the private sector could do it better, I think the outcome was that the private sector could probably manage it more efficiently than the public sector could.
Senator Gigantès: Probably, but it is difficult to predict the cost overruns of building 18 months ahead.
Mr. Rowat: True.
Senator Gigantès: It's therefore very difficult for any private sector company to predict 57 years ahead. So the figures that we're giving you were, let us assume, the best calculations they could make, but what would have happened if that deal had gone through and their calculations, because of circumstances, turned out to be wrong and they could not pay what they promised to pay?
Mr. Desmarais: There were default mechanisms in the lease, senator. So if they cannot pay and they default on the lease, the lease comes to an end and we have remedies under it. One of them is to terminate the lease. In doing that, we get the terminals back; but, in terminating this lease, we also got Terminal 3 back. So we would have full ownership of Terminals 1, 2 and 3 if they defaulted on their rental obligations to us.
Senator Gigantès: But there would have been a considerable upheaval.
I'm prepared to accept that the private sector can deliver certain services more efficiently at a higher cost to the public and the airlines, as Mr. Desmarais said at one point.
Senator Jessiman: That's not true.
Senator Gigantès: He said that yesterday.
Senator Jessiman: Well, repeat it and ask him again.
Senator Gigantès: Did you or did you not say yesterday -
Mr. Desmarais: I said the proposal yesterday indicated higher costs to the airlines and passengers. I didn't say the final deal did.
Senator Gigantès: The proposal, and the final deal did not?
Mr. Desmarais: The final deal indicated that the rates being charged were equivalent to Terminal 3 and competitive with other world airports with new construction. The charges to the passengers were controlled to the level that we historically, as Transport Canada, control the pricing levels.
Mr. Rowat: Senator, I wonder if I can add a point here because it hasn't come up and it has to and should come up before we conclude today or else we'll be back again.
One of the reasons for the reduction in rent in this proposal was because of a rebate to the airlines of 15 per cent, all the airlines in Terminal 1 and Terminal 2. That rebate was one of the major factors in terms of the rent to government being reduced from the very high level down to 843 million, net present value.
Senator Gigantès: Thank you.
The Chairman: Are you through?
Senator Kirby: No. I thought I was letting a supplementary go.
The Chairman: Oh, I see. Okay. They are long breaks. I'm sorry.
Senator Lynch-Staunton: They are getting longer and longer.
Senator Kirby: I wasn't complaining. I just wanted to know if it was mine.
On page 4 of that document, your last two paragraphs say as follows:
The financial return to the Crown is diminishing from that proposed by Paxport and can be expected to decline even further given the current expectations by Mergeco for indemnification for errors of omission and provision of compensation for diversion of traffic.
The next line:
The bottom line with respect to the government's objectives is that the current deal is being close to unacceptable.
Mr. Jolliffe, you wrote that on the 24th of June. Two months later we signed a deal. Yet, we're told that although there was a lot of issues to be dealt with, the major, the only really big, difficult, outstanding issue left was the Air Canada problem. How is it possible that in two months you go from saying that the deal is close to being unacceptable to one which you so enthusiastically supported for the last day and a half?
Mr. Jolliffe: Because we had agreement on how the terminals would be developed, the stages of development, how those investments would come through in the $96 million up front, how the financial return to the Crown was in fact achieved, and how the objective of dealing with the airlines prices and cost to users was achieved.
At this point in time, this was my feeling. Two months is not a long period of time, but in this deal, that was a fair amount of time. We were doing a lot of things. I still hold to my earlier statement that what we came up with was, with the objectives that we were following, a good deal.
Senator Kirby: So changing the negotiator had a dramatic impact in terms of your assessment of the outcome of the deal?
Mr. Jolliffe: No, I think that -
Senator Kirby: In the sense that all of this progress was made when the negotiator was changed.
Senator Jessiman: Hey!
Senator Kirby: That's a statement of fact. That's not even a -
Senator Jessiman: Ask them a question.
Senator Kirby: I just made a statement of fact.
Mr. Jolliffe: I think the strategies that we employed by making sure that everybody understood the objectives that we were trying to achieve around town and making sure that we received, you know, directions from the government as to how we would deal with various issues, helped us conclude the deal that I think, compared to the other alternatives, was the better deal.
Senator Kirby: Can I just ask you one comment on the last page I gave you - I'm sorry, the last document I gave you, which is a note from you to Gerry Berigan. This was before the RFP was even issued.
Mr. Jolliffe: Yes, sir. Gerry Berigan was my superior at that time. I was working for him. He was dealing with the advisory committee that I think Mr. Desmarais referred to yesterday.
Senator Kirby: What essentially is the document?
Mr. Jolliffe: It's a record of a telephone conversation that I took on Mr. Berigan's behalf from Ray Hession. Mr. Berigan wasn't in the office, and I took the telephone call. He started off by saying that he wanted to talk about a question of timing. If you want me to go through this, he said he assumes the government is okay on the RFP, meaning that he still thinks that an RFP is going to be coming out at some time in the future. He mentioned that he was leading a trade mission to Singapore and the Far East during from the period 26th of February to 13th of March, 1992. He said that he would like to have something before he leaves for Singapore.
Senator Kirby: What did he mean by "something"?
Mr. Jolliffe: I believe he meant that he would like to have the RFP in his hands by that time, thinking that it might be issued by that time so that he could give direction to the people that would be dealing with the RFP to get on with it whilst he was away. He was really concerned that he wouldn't be around when the RFP was issued.
Senator Kirby: In fact, the RFP was issued two days after - sorry, the RFP was three days. He got back on a Friday, he told us, and the RFP was issued on the Monday right after he got back.
Mr. Jolliffe: I believe so.
Senator Kirby: Was there any discussion about releasing the RFP? I guess bluntly the question is this: Was the timing of the release of the RFP timed so that Mr. Hession was back before it was released?
Mr. Jolliffe: Not at all, sir.
Senator Kirby: You think the timing was purely coincidental?
Mr. Jolliffe: Absolutely.
Senator Kirby: Thank you, Mr. Chairman. That's all I had.
Senator Lynch-Staunton: I'd like to go back to a previous discussion on the significance of certain dates leading up to the famous October 7 date.
In reading the transcript of last Thursday on that issue, which was brought up by Senator Bryden, and reading Mr. Rowat's testimony of yesterday, I find that there are two vastly different interpretations. Because that 7th of October date is so controversial, it's very important that we really have a complete and - well, a complete understanding of its significance, if any.
Now, before going into the date, let me just get everything straight. I'm going to use a chronology of events as prepared by the Library of Parliament.
On the 18th of June, 1993 -
Senator Kirby: This is not being difficult. Is this -
Senator Lynch-Staunton: The chronology of events, it's not numbered. It's in the briefing book and has been available every day since we started.
Senator Kirby: I wasn't complaining. I was just asking you what document so I can look at it.
Senator Lynch-Staunton: On the 18th of June, 1993, the government and T1T2 partnership signed a letter of understanding. A letter of understanding, can that be defined as the two parties have come to a general agreement on a discussion, and they are ready to proceed to the finalization of documents to confirm that agreement?
Mr. Rowat: I'm sorry. I missed the date.
Senator Lynch-Staunton: 18th of June, 1993.
Mr. Rowat: Yes. That letter of understanding was the status of negotiations at that point and what we intended to do from thereon in, the two parties.
Senator Lynch-Staunton: What was left to do at that time?
Mr. Rowat: At that point, I had just inherited the file, and we had the Air Canada issue outstanding. We had to finally settle the diversion threshold. We had Terminal 1, which we had to settle how long it would remain open and at what cost and at whose cost. We had the veto of indemnification issue. We had the environmental issue. We had issues of tenant equity and financing and the question of the personal facilitation charge.
Out of all of those, they had been brought very close to closure on many of them. The one large outstanding one was the Air Canada issue.
Senator Lynch-Staunton: On the 27th of August, an Order in Council authorized the Minister of Transport to enter into lease and development agreements with T1T2 on the basis of Treasury Board approval. At what stage are we at now in coming to a contract, a final contract?
Mr. Rowat: The minister had the authority he needed from the Order in Council to conclude the ground lease. He had the authorities from the government to proceed with whatever outstanding items there were, to negotiate those to conclusion, and finalize and sign the contract.
Senator Lynch-Staunton: On the 30th of August, the minister announces an agreement with T1T2 for modernization of Terminals 1 and 2. That's on the 30th of August.
Mr. Rowat: Correct.
Senator Lynch-Staunton: At that stage, is the agreement final?
Mr. Rowat: Not all of the negotiations were complete at that point, but all of the broad parameters of the agreement had been completed. There was an agreement in principle at that point on the largest items between the government, Pearson Development Corporation, and between Pearson Development Corporation and Air Canada.
Senator Lynch-Staunton: Were discussions so far advanced or the agreements so far advanced that if one or the other party wanted to back off, there might have been some serious repercussions? I mean - I'll word it another way.
Were the parties so firmly committed at that stage that there was no turning back unless by mutual agreement?
Mr. Rowat: There was an agreement in principle. If one of the parties had come back and wanted major material changes, then that would have sent us back to the drawing boards.
Senator Lynch-Staunton: "Sent us back to" -
Mr. Rowat: To the drawing boards.
Senator Lynch-Staunton: To the drawing boards or Treasury Board.
Mr. Rowat: Correct.
Senator Gigantès: Some board.
Senator Lynch-Staunton: So we can say that on the 7th of August, the parties were pretty close to a final agreement which was signed, as I understand by your testimony, Mr. Rowat, yesterday, on the 3rd of October by Pearson Development and on the 4th of October by Minister Corbeil?
Mr. Rowat: That's correct.
Senator Lynch-Staunton: And those were the two final - those signatures, in effect, concluded the final agreement?
Mr. Rowat: That's right, and those were then put into escrow.
Senator Lynch-Staunton: So it's important, then, to understand that the contracts, the final signatures to the contracts known as the Pearson agreements were signed by one party on the 3rd of October and by the Government of Canada on the 4th of October.
Mr. Rowat: Yes.
Senator Lynch-Staunton: Because the reason I want to stress that is that Senator Bryden, when he was questioning you on this, said:
Is it normal for the Prime Minister to direct a contract to be signed?
In effect, Prime Minister Campbell did no such thing. The contracts had already been signed on the 7th of October. That's correct?
Mr. Rowat: Yes. The direction that I got on the 7th was for me to sign to release the documents.
Senator Lynch-Staunton: Yes, but let me take you through all of this because there has been so much misinterpretation, whether deliberate or not, on the significance of Mrs. Campbell's directive that I, at the expense of repeating it too often, want to make it clear that on the 3rd and 4th of October, the final signatures to the Pearson agreements had been affixed. It was then that the documents, as you were about to say, were put into escrow.
Mr. Rowat: Correct.
Senator Lynch-Staunton: Right? The signed documents were put into escrow, the reason for that being, as you said yesterday, is that there were a number of conditions to be met, including to make sure that there was $61 million at the -
Mr. Rowat: Was available on closing.
Senator Lynch-Staunton: Was available, and so the documents were to remain in escrow until certain conditions - particularly that one - were met.
Mr. Rowat: It gave us the extra time to ensure that those various conditions were met.
Senator Lynch-Staunton: Right. Now had those conditions been met on the 3rd and 4th of October, there would be no need to put the documents into escrow, right?
Mr. Rowat: I'm not sure exactly where we were in the context of meeting those conditions precedent. We had worked out the time line days before.
Senator Lynch-Staunton: You mean no matter when the final signatures, it had been agreed that the 7th of October was the day, if all the conditions were met, that the documents would be released?
Mr. Rowat: The 7th was the chosen date that the deal would be concluded.
Senator Kirby: Chosen by who?
Mr. Rowat: As I explained yesterday, we had indicated to ministers that in August - and to the other side - that the end of September would be probably when we would have all of our legal documents in place. I don't recall who actually chose the date of October 7th, but that was concluded as being the best date that would be available. I think the documents were only finalized sometime in late September, early October. So that was just a convenient date.
Mr. Desmarais: Could I just clarify something? The October 7th date was a date that was discussed with the other side in early July, and there was a discussion between myself and Mr. Peter Coughlin. We agreed at that time that October 7th sounded like a reasonable date to work towards, and that's where the October 7th date came from. It was during the first week of July we discussed it. So it was a decision, if you like, of the bureaucracy and the other side that made the decision on October 7th.
Senator Lynch-Staunton: Well, then, so the 7th - yeah, I was describing it because somebody gave me some documents relating to this.
Mr. John Nelligan, Q.C., Counsel to the Committee: Excuse me. If I may interject, senators, when we heard that yesterday, I asked for the production of the document that Mr. Rowat signed. It's just been delivered to me by his department now. It's called "authorization to release escrow documents and funds," and I think perhaps we should distribute them.
Senator Kirby: Mr. Chairman, may I say something?
Your timing is getting superb.
Mr. Nelligan: Thanks to Mary-Lee McLaren down there.
Senator Gigantès: On this point, I want a tiny supplementary.
The Chairman: Is that all right, senator?
Senator Lynch-Staunton: If it's tiny. Do you have a number?
Senator Gigantès: This is my seventh supplementary.
In testimony which I've been reading in the transcripts, Mrs. Bourgon said that after you asked - was it you, Mr. Rowat, who asked for direction as to what -
Mr. Rowat: Yes. I spoke to the deputy minister, and she had already concluded that we should seek direction. I certainly agreed with her when I spoke to her.
Senator Gigantès: And you got this direction. The document is 00092, a fax to B. Rowat, Associate Deputy Minister of Transport, by J. Bourgon, Deputy Minister of Transport. It says:
1) The Prime Minister, the Right Honourable Kim Campbell, has instructed Mr. Glen Shortliffe to proceed -
Senator Lynch-Staunton: I said a tiny supplementary, Mr. Chairman, not a speech.
Senator Gigantès: This isn't a speech; it's a document.
Senator Jessiman: It was read in twice yesterday.
Senator Gigantès: So what is the relation between this direction given by the then Prime Minister to what we're talking about? The date is October 7th.
Mr. Rowat: When Madam Bourgon and I discussed the need for some direction to release the documents, she in turn had discussions with Glen Shortliffe, the then clerk, and my understanding is that they then contacted PMO looking for the kind of direction that we were requesting.
Senator Gigantès: This doesn't talk of releasing from escrow. It says:
- to proceed with the signature of the remaining legal documents concerning the transfer of T1/T2 this afternoon at 1400 hours.
Mr. Rowat: I don't know who drafted this. The remaining -
Senator Gigantès: Shall I give it to you?
Mr. Rowat: I've got it.
Senator Gigantès: You've got it?
Mr. Rowat: I have it.
Senator Gigantès: Well, it's Mrs. Bourgon who has drafted it.
Mr. Rowat: Well, I'm assuming that the relevant legal documents released from escrow - I'm assuming that's what she meant by relevant "legal documents".
Senator Lynch-Staunton: If I may continue, Mr. Chairman.
Senator Gigantès: I'm finished. Thank you.
Senator Lynch-Staunton: So the contracts are signed on the 3rd and the 4th of October. Those are the final signatures by the two contracting parties, Pearson Development - or T1T2 - and the Government of Canada.
On the 7th of October, the Prime Minister is asked for her opinion as to whether what has been agreed to be done on the 7th of October, because all the conditions have been met, to release a document from escrow - my question is why consult the Prime Minister when all the conditions have been met and both parties had agreed that if the conditions were met, the 7th of October was a date which had already been predetermined as early as July? Why go to the Prime Minister? Because it was not - I'm sort of answering my own question here.
Senator Kirby: That's not surprising.
Senator Lynch-Staunton: Well, it is because it supports the question. The answer I will give is that the contracts had already been signed. The parties had agreed to the 7th of October. What would have happened if Mrs. Campbell had said "no"? I mean could she say either "no" or "yes" because both parties had agreed and all the conditions have been met? I mean why involve the Prime Minister of Canada in a situation where there was no need for her intervention?
Mr. Rowat: Well, there were alternatives in that we could have - one other alternative would have been to request from Pearson Development a delay voluntarily.
Senator Lynch-Staunton: But why would you want to do that?
Mr. Rowat: I'm not saying that we would want to do that, but I'm saying that there were alternatives. If you are saying that there was no other way that could have been taken, there were other ways it could be taken.
Senator Lynch-Staunton: I gather, Mr. Rowat, from what you've said is that the initiative to consult the Prime Minister came from Mrs. Bourgon, who was then deputy minister of the department?
Mr. Rowat: That's true.
Senator Lynch-Staunton: And because you were chief negotiator, you were obviously drawn into the conversation.
Mr. Rowat: Yes, and -
Senator Lynch-Staunton: But it's fair to say, then, that perhaps -
Senator Kirby: Why don't you let him answer the question. Come on, John. You're asking questions, and -
Senator Lynch-Staunton: Because he's already answered in his testimony yesterday.
Mr. Rowat: As I said yesterday, I was concerned that here we were in - and I was concerned on my own behalf as well, as you can imagine. We were in the middle of an election campaign. This issue had become hotly contested in the days just prior to this, and that even though I was just releasing documents from escrow, I wanted to make it - I wanted to have a very clear direction as to what I was doing. That is what I discussed with Madam Bourgon about getting that clear direction, and that is what she in turn sought by Glen Shortliffe.
Senator Lynch-Staunton: How could you refuse - that's why I don't understand. How could you or the Government of Canada refuse to release the documents if the conditions had been met by a date that both parties had agreed to? That is the part I don't understand. How could you refuse to, unless Pearson said, "Well, we understand the controversy, and we'll agree to a delay." But if you could not get the agreement of Pearson, how could you even suggest that the release could not take place?
Mr. Rowat: I suppose if the direction had been not to sign, I wouldn't have signed. Frankly, I don't know what happens in a situation like this.
Maybe counsel can advise. What happens if you refuse to release the documents from escrow, if one side refuses to release a document from escrow? I don't know what would happen.
Senator Lynch-Staunton: I think the government would be faced with a tremendous court action.
Maybe we should direct these questions to Mrs. Bourgon because she's the one who initiated the -
Mr. Rowat: No. I think both Madam Bourgon and Mr. Glen Shortliffe are people you can and should consult on this issue.
Senator Lynch-Staunton: I'll set that one aside for a moment and pick up where Senator Gigantès left off, that is, that the wording of the instructions do lead to a misunderstanding. The Prime Minister instructed Mr. Shortliffe to proceed with the signature of the remaining legal documents. The legal documents mentioned are those necessary to release the agreements from escrow.
Mr. Rowat: Correct.
Senator Lynch-Staunton: It has nothing to do with the agreements themselves in terms of putting a final signature on the Pearson agreements.
Mr. Rowat: Except that - I haven't looked at the documents recently that you have in front of you, but I was also testing that conditions precedent had not been met that had not been met in the prior -
Senator Lynch-Staunton: I'm sorry, which?
Mr. Rowat: The conditions precedent, like the 61 million was available on the date of closure.
Senator Lynch-Staunton: Right. The conditions had been met, but those were conditions which had been confirmed by the final signatures on the 3rd and 4th of October.
Mr. Rowat: No.
Senator Lynch-Staunton: Well, the 61 million surely was part of the contract.
Mr. Desmarais: There are several things that had to be delivered by the other side and by the government by October 7th, senator. One was, as we mentioned, the $61 million - the proof that they had $61 million in the bank. There was the submission from the Competition Bureau that they met the requirements of the Competition Bureau. There was things from Air Canada that their board of directors had agreed to the agreement to lease. All of these things had to come in and be catalogued and affirmed that we had received them. Those were the types of things that Mr. Rowat was talking about that weren't available to us necessarily on the 3rd and 4th.
Senator Lynch-Staunton: And this is all listed here and it's all very clear.
Senator Gigantès: And they were available on the 7th?
Mr. Desmarais: Yes.
Senator Gigantès: All of them?
Mr. Desmarais: Yes, sir.
Senator Lynch-Staunton: As Senator Gigantès pointed out, this can be misunderstood when it says:
You are therefore authorized to sign the relevant documents. This has nothing to do with the contracts themselves, but the authorization to release escrow documents and funds.
Mr. Desmarais: Exactly.
Senator Lynch-Staunton: So Mrs. Campbell, then the Prime Minister of Canada, was requested not to force the contracts through by election day. She was asked to give authorization or to confirm an understanding already reached between the Government of Canada and Pearson Development.
Senator Gigantès: Three days earlier. Only three days earlier.
Senator Lynch-Staunton: I don't want to go over the sequence of events. I hope you will read the transcript, and you will find that the letter of understanding is the one that sets off the completion of the contracts. The letter of understanding can be considered as a moral obligation by both parties to pursue to the end discussions which had led so far to allow a letter of understanding.
The point that I'm trying to make is that Senator Bryden, in saying that on the 7th of October a contract was signed, is, to say the least, causing a major misunderstanding. There was no contract to sign on the 7th of October. He did ask you, Mr. Rowat - and I will end here on this topic - because he did ask you:
Is it normal for the Prime Minister to direct a contract to be signed?
The Prime Minister was not asked for a - sorry. The Prime Minister did not direct a contract to be signed. She did direct that an understanding reached be concluded. Is that correct?
Mr. Rowat: Yes.
Senator Lynch-Staunton: I mean you are nodding, but a nod doesn't appear in the transcript.
Mr. Rowat: You have in front of you the instruction that I have. Beyond that, I really think you should put your questions to Glen Shortliffe and -
Senator Lynch-Staunton: Well, I think you've cleared up a lot of this point, and I thank you.
The other point is that I find and I know all of us will find that the testimony of the three of you will be extraordinarily valuable because I think you are the only three from the government side who together will appear here - any three from the government said or any side for that matter who will appear here and be able to show that they have had experience in these agreements from the beginning, right through to the end, collectively speaking. To have you three appear as many hours as you have has been extraordinarily valuable and helpful in coming to a determination, which is one of the many that the Senate has instructed us to find and, that is, were the Pearson agreements to the benefit or not of the taxpayers of Canada? Your testimony will certainly help us a long way in coming to that determination, hopefully unanimously.
We have had discussions, and I'm not going to make a speech but, I just want to focus on the essentials -
Senator Gigantès: Oh, make a speech. You usually do.
Senator Lynch-Staunton: We can argue about privatization versus public ownership, and we can argue about the private developer versus the LAA or the CAA as it's now called, but what we are trying to determine here is not the philosophy of ownership or the management of public assets. We can argue that, of course, but what we're trying to determine is were these agreements, once finally concluded, to the benefit of the taxpayers of Canada and, in particular, to the Toronto region.
A lot of the assessment of the agreements results from the Nixon report. The Nixon report must be mentioned because were there no Nixon report, there would be no Bill C-22. Were there to be no Bill C-22, there would be no inquiry. So everything flows from the Nixon report.
I'm glad Mr. Nixon is coming to defend it because a lot of things have been said about it and many people have been critical of it. It's only fair that he come and give us his views on it.
But as a result of the Nixon report, many things have been said about these agreements, about the participants in it, and about some members of the Senate who have questions about C-22. The remarks made by Mr. Nixon have been picked up. They have been embellished to the point where there have even been hints of illegalities taking place in the whole procedure. Now, you have reassured us, I think, in answer to senator - "I know", not "I think". I know, in answer to Senator MacDonald's questions yesterday, that you are satisfied, the three of you, that due process was respected, that there was no - to use one expression - "hanky-panky" during the whole process.
I also want to ask you -
Senator Gigantès: They never said "hanky-panky".
Senator Lynch-Staunton: No. I'm using my expression.
Senator Gigantès: Good.
Senator Lynch-Staunton: What I want to ask you also is do you agree with certain remarks made by not insignificant members of this government that this deal is immoral, for instance? This deal has been categorized as immoral. Would you go along with that, any of you or all of you?
Mr. Rowat: Senator, people will have to review the evidence for themselves on the final arrangement worked out.
I think that myself and my colleagues have indicated to this committee the facts as we know them during the periods which we were involved in it. Beyond that, I think that others, who may have broader knowledge or access to facts that I don't have, have sized it up, made their own conclusions and made whatever public statements they've made.
Senator Lynch-Staunton: Well, you made that clear yesterday. The reason that I'm insisting on perhaps having you repeat it again today is because you are the only three that we can bring together who have had such a broad experience in these agreements together from the beginning, right to the end. I don't know any other three who can come before us with the same experience and expertise as you three. Your assessment of the contract, taking into - and I know that you have to be very careful in how you answer certain blunt questions in the position that you are in and I respect that. Still, your views are very important.
For instance, it's been said of these agreements that there was uncontrolled lobbying. Can you or were you subjected or are you aware of any uncontrolled lobbying going on? I don't know what it means, but it sounds as if lobbyists were practically in ministers' offices and your offices hammering away to get this deal done. Were you objected to, however we define it, uncontrolled lobbying?
Mr. Rowat: During my tenure - which was in the final stages of negotiation - there for the last three or four months over a three- or four-year period - during my tenure, we were in the midst of negotiations with the formerly appointed negotiators on the other side. There were no lobbyists involved in the process at that stage, and I can't comment on earlier stages. Maybe my other two colleagues can.
Mr. Desmarais: I never met a lobbyist throughout the whole process here, so that is the best I can tell you.
Senator Lynch-Staunton: You better not tell whoever hired the lobbyists.
Senator Gigantès: A supplementary on this?
Senator Lynch-Staunton: No. I want Mr. Jolliffe to answer too, please.
Mr. Jolliffe: During my early days on the project, there were two lobbyists that had contacts with Mr. Berigan, and I think he's already attested to that. Obviously the types of telephone calls from Mr. Hession prior to the RFP being issued could be of that type of distinction, a lobbying type of question.
That's the only time I ever had any experience with lobbyists. There were certainly none around during the period of the RFP or the RFP evaluation, neither during the period when Mr. Ran Quail was the chief negotiator, nor during the period when I was working with Mr. David Broadbent, nor during the whole period when I was working with Mr. Rowat.
Senator Gigantès: Supplementary on this?
There is a document that says that lobbyists were abuzz. We've seen it before. 00189. So there were -
Senator Tkachuk: They're always abuzz, buzzing around everywhere.
Senator Gigantès: Not around the ears of Mr. Jolliffe.
Senator Lynch-Staunton: They sounded like they were drones around the Pearson development. Thank God I didn't hire them.
Mr. Jolliffe: Excuse me, senator. That's a comment that Mr. Hession made and was recorded on this document. Mr. Hession was saying that "Lobbyists are abuzz", and he meant other lobbyists beyond himself, perhaps.
Senator Lynch-Staunton: So I'll end on this, Mr. Chairman. Thank you your patience and that of my colleagues.
Can we say, gentlemen - can you reconfirm after your experience with this whole file, which has been complicated and controversial, whether one can question how the merger came about or the financeability or the financing problems of one party, that what was cancelled - it hasn't been cancelled officially yet, but de facto it has been cancelled - are agreements which, had they been allowed to run their course, would have been to the advantage of this country and in particular to the region of Toronto?
Mr. Rowat: That's not for an official to assess. The government of the day, giving us their direction and us negotiating on their behalf, felt that it was an appropriate deal under the circumstances.
Senator Lynch-Staunton: Thank you.
Maybe Mr. Desmarais would like to add - No? Okay.
Senator Gigantès: Supplementary on this, Mr. Chairman?
The Chairman: I thought another question had been put to Mr. Desmarais.
Mr. Desmarais: He asked if I had anything to add to Mr. Rowat's statement, and I don't.
Senator Gigantès: Mr. Jolliffe, earlier when you were discussing document 00189, you said that these were comments by Mr. Driedger.
Mr. Jolliffe: No, sir. I said this was a record of a telephone conversation that was taken by Mr. Driedger and that I said that the comments in here were comments on the meeting, which was a meeting between the deputy minister, myself, Mr. Bob Greene, who is our legal counsel, and Madam Lelay, who was I think the chief of staff to the minister, and Mr. Hession and Mr. Kozicz and Mr. Jack Matthews of Paxport. These were comments that were taken from that meeting, most of the comments being comments by Mr. Hession recorded -
Senator Gigantès: This appears on the second page.
Other Comments on the Situation:
- McAree was chasing everyone around. He called several people trying to get info including: Mattson, Driedger, Matick, and Jerry Cance from Lockheed.
- ADM's view is that Shortliffe is trying to orchestrate something.
- Lobbyists are abuzz.
- Many not-so-well-veiled threats during the meeting.
Surely Mr. Hession didn't say you were threatening him.
Mr. Jolliffe: No, no, the other way around, senator. Mr. Hession was saying we need to get on with this thing. Here we have you demanding that we go through this financeability test, that we address all the other issues. There was frustration on Mr. Hession's part that they had spent so much time putting together what they thought was an excellent proposal, that it had been evaluated and been declared to be the best overall acceptable proposal -
Senator Gigantès: No, no. The point I'm getting at -
Senator Tkachuk: Let him finish.
Mr. Jolliffe: - and he was wishing to get into -
Senator Gigantès: I'm prepared to accept any answer. All I'm saying is -
The Chairman: Would you let Mr. Jolliffe continue and answer the question, please.
Mr. Jolliffe: Mr. Hession was saying that he wished to get into substantive negotiations, but I'm not the author of this document. I'm trying to explain it for you, senator.
Senator Gigantès: Then why did you say, if you're not the author of this document, that it's Mr. Hession who said that "lobbyists are abuzz"?
Mr. Jolliffe: Because I was at the meeting, sir.
Senator Gigantès: And he said "lobbyists are abuzz"?
Mr. Jolliffe: Yes, sir.
Senator Gigantès: He said that himself?
Mr. Jolliffe: Yes, sir.
Senator Gigantès: And did he make the not-so-well-veiled threats, or who did?
Mr. Jolliffe: The not-so-well-veiled threats are "Let's get on with this thing." "How much more do we have to wait before we get into the negotiations?" "What's holding this -
Senator Gigantès: That's not a threat. The threat is, "If we don't, this is what we will do to you."
Mr. Jolliffe: Maybe that was a poor choice of words, whoever wrote this.
Senator Gigantès: Thank you.
Senator Hervieux-Payette: Just a point of clarification on Senator Lynch-Staunton's, not question, but about the June 18 agreement.
I have a document, 1253. It was given to me this morning and it is - there are two numbers. I'm a bit confused because it's 1263 on the cover page, but when I refer to 1253 - I guess it may be the number of the page or whatever.
Mr. Nelligan: It's been stapled together backwards is my solution to that problem.
Senator Hervieux-Payette: That's probably the reason.
Mr. Nelligan: You have to go to the back page, and that will give you the first page.
Senator Hervieux-Payette: When you refer to the June 18th letter of intent, I refer to what has been written by that document. So who has written that document that says this:
Non-binding letter of intent signed June 18, 1993 by Deputy Minister of Transport, H. Labelle, and Paxport and Claridge (T1T2LP) agreeing that the draft of final legal documents would continue and that the Government would seek the approval of the Treasury Board and Governor-in-Council of the final documents.
Who prepared that? I suppose this was more or less your ongoing task to be done, you know, agenda for the weeks or months to come.
Mr. Rowat: I just got the document. Can you refer me to the page you're on?
Senator Hervieux-Payette: It's 1253. It's the sixth page because they are in reverse.
Mr. Nelligan: If I may assist the witness, this is the October 29th document, Mr. Rowat, which I believe was sent to Mr. Nixon.
Mr. Rowat: Exactly.
Mr. Nelligan: Perhaps on that basis you will be able to identify the pages.
Mr. Rowat: Okay. I have it.
Senator Hervieux-Payette: So we identify the - because I think we try to clarify what were - when was the binding agreement on both parties taking place? I mean was it June, was it August, was it October 3rd, or was it October 7th to know when the government could have said, "Well, I don't move with that." One of my questions would be - before we clarify that, from what you said before, you said that at least what Mrs. Campbell could have directed you would be just to withhold the release of the document and wait until the election is over. I mean if you had received that memorandum saying "I direct you to withhold" - and, of course, this would have been after discussion with the contracting parties. With all the turmoil and high profile discussion on this agreement, they could have had more or less a cooling off period until the election is done. Then, of course, people could have at least gathered at the table maybe out of good will. I mean, I'm not saying - I'm not talking about - we go back to when was the government legally bound by the agreements. So you say that you could have received that, and of course you would have abided by this instruction from Mrs. Bourgon.
When you received - I tried to interpret what took place on October 7th. I was interpreting the word literally, saying that there were still signatures to be put on. You said to us that this was the release of documents, and here on that document it says:
Final documents signed by the Crown and T1T2LP on October 7, 1993.
So I still have another document saying that the final document and the legal agreement was finalized on October 7th, not on October 3, not 4, neither in August, but the final signature by the government was on October 7th.
Senator Jessiman: That's what the document says, but the witness says, who was there, that it was signed on the dates he said.
Mr. Rowat: When all of the conditions precedent were met was October 7th. On that basis, I had the authorization to release the documents from escrow. So the final documents include ensuring that the conditions precedent were met. That's what that meant.
It could have been more descriptive. We could have taken a paragraph to describe exactly what the situation was, but this was a cryptic deck to try to explain in point form what the nature of the deal was.
I should explain this document. This document was prepared at the outset of Mr. Nixon's month-long review and provided to him as an outline of all of the arrangements pertaining to the overall agreement.
Senator Hervieux-Payette: Who prepared it?
Mr. Rowat: My team and I had prepared it just days in advance of Mr. Nixon being appointed and then provided it to him on the 29th.
Senator Hervieux-Payette: So this was done in what, October?
Mr. Rowat: It was done in the week just prior to the 29th. It's based on a lot of earlier work.
Senator Hervieux-Payette: Okay. Mr. Desmarais, when you said you had October 7 in mind in July, since there were several changes of dates for signing this and signing that because during the course of - even in that document, we see that, for instance, in the third item:
Deadline of February 15, 1993 extended to March 1st, 1993.
So it was not - I mean there was an extension provided then.
Senator Lynch-Staunton: By mutual agreement.
Mr. Jolliffe: Excuse me, senator. That deadline respects the financeability question for Paxport.
Senator Hervieux-Payette: Yeah, you gave an extension.
Mr. Jolliffe: That's right, for the financeability question, not for signing a new set of documents.
Mr. Desmarais: We agreed to work towards October 7th and early July. I mean there wasn't a date cast in stone. If things had of slipped, we would have moved the date obviously, but as things came together, October 7th became more and more realistic as we went through August and September and early October.
Senator Hervieux-Payette: I don't remember, Mr. Chairman, if we have, in the tonnes of documents we have, the letter of intent. I guess I will have to refer to that letter of June 18th.
Do we have it, Mr. Nelligan?
Senator Gigantès: Non-binding letter of intent.
Mr. Nelligan: I believe that's available in the documents.
Senator Gigantès: A non-binding letter of intent means it is non-binding. You were saying earlier, sir, that by the time you reached the stage where you signed the letter of intent, that's it.
Senator Lynch-Staunton: If you read the transcript, you'll see I said he had a moral obligation. That's what it is since they had already agreed on the date, the 7th of October, as early as July.
Senator Gigantès: But it's a non-binding -
Senator Lynch-Staunton: I know it's non-binding.
Senator Gigantès: Well the reason the words "non-binding" are put there by lawyers normally is because they want it to be non-binding.
Senator Lynch-Staunton: It's completely irrelevant.
Senator Hervieux-Payette: Mr. Chairman, and also to our counsel, I think it would be important that we have some clarification. Since we're dealing with common law and I'm with civil law in Quebec and the jurisprudence is not the same, I think we need to clarify the question as to when all the obligations and all the conditions were met so that we know when the contract was in effect. I mean, was it on October 7th? Was it on October the 3rd? Because most of the time when the conditions are not realized, the contract is not, at that time, legally binding. This is my civil law approach. I don't know how it is in common law.
Mr. Nelligan: If I might just comment, I think perhaps we may have to call the lawyers who were involved; but, as I understand the process as described by these witnesses, the documents were signed subject to a condition subsequent or a series of conditions subsequent. If you will look at the documents that we just got this morning, there is a whole list of matters that had to be done by each side. In the normal course - and I don't want to discuss this particular one - if you've signed a document which comes into effect on fulfilment of those conditions, that is an automatic event. It's simply a matter of acknowledging that the events have occurred. In other words, it's an automatic process at that point because consent has been given subject to the 61 million and so on. Once that's filed, then there's a binding agreement.
Now there may be some difference here when I've taken a detailed look, but I think this is what Senator Lynch-Staunton was referring to.
Senator Hervieux-Payette: I would put it in a more simple way. I mean if I buy a house in Ottawa and I put an offer with the price conditional that my bank agrees to the loan, I am obliged to buy it only if the bank says "yes". If the bank says "no", I can move away from my offer because I mean one of the very important conditions -
Mr. Nelligan: But the difficulty is that if the bank says "yes" without you knowing about it, you are bound whether you like it or not because you have agreed that that is a condition.
I think in this particular case, the point that was being made was that these conditions have been carrying on in the normal course, and they had occurred; therefore, it all fell in. That's subject to someone -
Senator Hervieux-Payette: I think in this case it's more than a house. I think it's $61 million, so it's maybe a few houses. I mean it was a very important condition.
Sometimes we know that in big business deals, I mean even though you are in good faith, you can at the last minute not obtain the funds. I mean the market conditions are changing. The bankers are usually, we know in this committee - some members of our banking committee are sitting with us - that sometimes this condition may not have materialized.
Mr. Nelligan: I understand from the witnesses that in this case they say they had materialized.
Senator Hervieux-Payette: So that's why I'm saying that the contract, if I understand correctly your legal interpretation - of course the day the contract was effective was on October 7th when all the conditions were met and all the documents were in and everything was in order.
Mr. Nelligan: That's right.
Senator Hervieux-Payette: Okay. I'm sorry to have this discussion with our own -
As far as the August 30th discussion with - not discussion, but the Minister of Transport, Jean Corbeil, announced agreement with T1T2 partnership for modernization of Terminals 1 and 2. It was at that time - I mean, since you are talking about the process and this is certainly one of your specialties, how many other conditions had to be met after that in order to have a contract? Because, I mean, can a minister on a contract of that size, by himself, bind the government?
Mr. Desmarais: At that point, the minister had authority to sign the ground lease; so, he could have bound us at that point, on August 30th, by signing that lease.
Senator Hervieux-Payette: But not the whole Terminal 1 and 2.
Mr. Desmarais: That would have been it. They would have had Terminal 1 and 2 at that point. Without a development agreement, without an operations agreement -
Senator Hervieux-Payette: Okay, but they were agreements that were not part of that.
Mr. Desmarais: There were agreements that did not require Treasury Board approval that we were still working on, and they weren't completed until late September.
Senator Hervieux-Payette: So you did that piece by piece, rather than one total - I mean, sometimes we arrive at the end of a deal, and we sign every document. We have piles of documents in a room like this, and we start from the beginning to the end. In this case, you had, I would say, two steps, ground lease and -
Mr. Desmarais: We had authority - the minister had authority to sign the ground lease on basically August 27th. He didn't sign it then. I mean, we put that aside. We got all the documents together, and there were several suitcases that were delivered to him in Montreal on the Monday, October 4th, to sign.
Senator Hervieux-Payette: So he had the authority on that date, but they were signed just on October the 4th?
Mr. Desmarais: That's correct.
Senator Hervieux-Payette: So that's why you needed to lock them up?
Thank you. I think that's clarifying for me at least.
The Chairman: Now, colleagues, on our original work plan, we've agreed to certain things. These witnesses have been extremely helpful, forthcoming and very, very well informed. They have been here now a full day and a half a day. The questions that have arisen now - we usually at this time turn it over to our Counsel to the committee to wrap up and to ask a number of questions. If there is any time left, I'll recognize -
Senator Jessiman: I've been up since six o'clock reviewing this material. You knew because I told you that I had some material that would take about 20 minutes to put in. I've sat here, and I know there's other material. I think these witnesses should be brought back for another hour. If you are going to overrule, we will not get in some information that's very important as to what instructions Mr. Nixon has given.
Mr. Rowat: Mr. Chairman, I wonder if we could just take a couple of minutes' break as witnesses if you have some technical matters to discuss?
The committee recessed.
Upon resuming.
The Chairman: Gentlemen, we've resolved our little problem thanks to the generosity of our friends here. My acrimonious friends to my right aren't speaking to me, but we have agreed - if it's all right with you, I would like Mr. Nelligan to pose a number of questions to you, following which, if you can bear with us for another half an hour, which may be 12:30, maybe 12:15 - would you do that?
Mr. Rowat: Sure.
The Chairman: Mr. Nelligan.
Mr. Nelligan: Gentlemen, we've been discussing this morning the report that you prepared for Mr. Nixon dated October 29th. For the purpose of clarification, I understand that document exists in two forms. There's one dated October 29th and one dated November 4th; is that correct?
Mr. Rowat: Correct.
Mr. Nelligan: I gather they are basically the same, but the later one is simply an update with some additional information.
Mr. Rowat: That's correct, some clarifications.
Mr. Nelligan: Can you tell me, please, what your instructions were with regard to preparing that memorandum?
Mr. Rowat: During the week that Mr. Nixon was appointed - he was appointed on the 28th, I think it was, Thursday, the 28th. During that week, which was the week after the election, it had clearly been stated by the incoming government that they intended to do some sort of review of the overall agreement. Therefore, at our own initiative, we put together the relevant information in a very concise form - if you call 30 pages a concise form, but it was in bullet form - to take whoever was going to be nominated to do the review through the overview of the deal. So we put that together and had it ready.
When Mr. Nixon was appointed on the 28th, he in fact came around to see Jocelyne Bourgon and myself and introduced himself on the 28th. I indicated that we had this background document, and he requested at that point whether we would send it to him the following day, which is what I did.
Mr. Nelligan: All right. There was one question with regard page 1238 of the October 29th document, item 11.
Mr. Rowat: Are you dealing with the table of contents?
Mr. Nelligan: The table of contents, item 11, "Possible Outcomes of Review".
Mr. Rowat: Yes.
Mr. Nelligan: The question might be put, why were those designated as the only two possible outcomes of the review?
Mr. Rowat: I think it was taken for granted that the other obvious option was the one that we had just gone through in detail. So in fact there were three options. There was the one in the body of the document, and then possible other outcomes - what should have been possible other outcomes of the review.
Mr. Nelligan: I see. What outcome did you suggest in this document?
Mr. Rowat: I don't think we recommended an option. I think we just took them through the elements of the deal with no recommendation.
Mr. Nelligan: That was the index. In the main body, you still have possible outcomes of the review. You have stopping the deal, and then you have renegotiate, restructure the deal. Those were the only two options that you discussed.
Mr. Rowat: But the agreement itself had just been outlined fully in the document.
Mr. Nelligan: I see.
Mr. Rowat: So the options were go with what was on the table, or the other two options were restructure or cancel.
Mr. Nelligan: All right. After these documents had been given to Mr. Nixon, did he then meet with you to discuss them?
Mr. Rowat: He did. We sent them to him on the Friday. We met with him on Monday. When I say "we", it was John Desmarais, Wayne Power and myself, which was November 1st. It may have been a Tuesday.
Mr. Nelligan: And what other documents was he given?
Mr. Rowat: He was given a list of documents.
Mr. Nelligan: There is a letter, sir - and I don't have it in front of me - where I think there are some 16 items.
Mr. Rowat: Correct.
Mr. Nelligan: So we have that, but perhaps can you tell us, was there anything else given to him beyond that list and this memorandum?
Mr. Rowat: Okay, beyond that list -
Mr. Desmarais: Not on that date. He did get other information from Pearson airport, the financial statements that were delivered by the site manager to him. I believe there's another couple of letters on your file where we sent him some factual information later an. I can't recall. There was maybe one or two more documents he was sent.
Mr. Nelligan: Then if we can turn to the Nixon report, do you have it available to you there now?
Mr. Rowat: Not the report.
Mr. Desmarais: Not the report. I don't. Mr. Rowat may have a copy of it.
Mr. Nelligan: You can all look over each other's shoulders.
Mr. Desmarais: We have the report now.
Mr. Nelligan: Looking at the history that he suggests, on the first page it recites the unsolicited proposal by the Matthews Group. I think Mr. Desmarais has already indicated that he was asked about that. To your knowledge, did anyone ever inform him about the other unsolicited proposals?
Mr. Desmarais: I may have, senator. I'm trying to recollect, senator.
Mr. Nelligan: I haven't been appointed yet.
Mr. Desmarais: Sorry, Counsel.
Mr. Nelligan: I'm working on it.
Senator Kirby: He just looks like one of us.
Senator Gigantès: I highly recommend him, Mr. Chairman.
Mr. Desmarais: I'm obviously losing my focus here as well.
I may have talked to him about the other unsolicited proposals during the conversation on this one. I can't recall exactly, Counsel.
Senator Jessiman: I don't think that was your evidence yesterday.
Mr. Desmarais: No. My evidence yesterday was I said that we had discussed this. He had questioned me about this when I answered questions on this one. I'm saying now that after having talked to some of my colleagues last night that I may have discussed the other ones with him.
Mr. Nelligan: Okay.
Now turning to page 4, where he analyzes the agreement, first of all, he refers to over 20 separate contracts. I believe there are substantially more contracts and agreements than that that were ultimately exchanged between the parties.
Senator Kirby: What page?
Mr. Nelligan: I'm sorry. Page 4, first paragraph.
Mr. Desmarais: I'm not sure of the exact number of documents.
Senator Jessiman: The evidence that you gave was 65.
Mr. Desmarais: Sixty-five? I would have to go to the closing documents and count them.
Mr. Nelligan: Then in the next paragraph, in his last sentence, he said:
The beneficial ownership of T1 T2... was made known to the Government of Canada but was not made fully public when the agreement documents were partially disclosed during the election campaign.
Do you know the basis upon which that statement was made?
Mr. Desmarais: During the negotiations, the beneficial ownership of the partnership right back to the parent corporations - ie., in the case of Claridge to the Bronfmans - was made known to the government. The other side requested that we keep some of the details of that confidential and not release it, which we respected.
Mr. Nelligan: All right. Were they ultimately made public?
Mr. Desmarais: Ultimately, I believe in the case that was before the courts, the total ownership was made public.
Mr. Nelligan: As a matter of business practice - or, rather, government practice - would this be an unusual or normal request?
Mr. Desmarais: It can be a usual request that certain aspects of their dealings with individuals and partners, if you like, of their corporations be kept confidential, and that's -
Senator LeBreton: Did you say usual request, Mr. Desmarais?
Mr. Desmarais: It can be a usual request. I'm saying that because of your partnership arrangements, if you have business dealings that you don't want disclosed, particularly publicly, we would respect those. It's commercially confidential.
Mr. Nelligan: They talk about the term for 57 years. Then they say that it's for 37 years and then the option. Was there, in the view of the government negotiators, any problem about the length of this lease?
Mr. Desmarais: No, sir.
Mr. Nelligan: In your view, was it a necessary or additional addition to the contract?
Mr. Desmarais: I believe the RFP allowed for the 57-year lease by giving you a year of termination. The year of termination was determined based on the Terminal 3 lease.
Senator Kirby: Would you permit a tiny supplementary?
Mr. Nelligan: Yes.
Senator Kirby: Just as matter of curiosity, 57 is such an odd number for a mathematical mind. I realize it was in the RFP. How did you ever arrive at 57?
Senator Jessiman: T3.
Mr. Desmarais: Terminal 3.
Senator Kirby: So that's what you did is copy it so they would not expire at the same time, but they would be the same length.
Mr. Desmarais: They would expire at the same time.
Senator Kirby: So the 57 was worked backwards.
Mr. Nelligan: So you would be in a position to have all terminals free at the same time.
Mr. Desmarais: That's correct.
Mr. Nelligan: Was this explained to Mr. Nixon?
Mr. Desmarais: I believe so.
Mr. Nelligan: He then says:
The annual rent for the first 9 years begins at $27 million... and rises to $30 million annually.
Do you agree with those figures?
Mr. Desmarais: I believe those are the figures of the minimum guarantees in the lease from the lease payments. Minimum guarantees were coming to the Crown in those first nine years.
Senator Jessiman: Isn't there another million on another piece that he's forgotten? I'm told it was 28 million.
Mr. Desmarais: I'm saying that those figures are correct, that the annual rent to the government for the first nine years in the main lease, those are the numbers. There's another lease for the central heating plant which starts at $1 million a year and escalates from there. So these numbers, if I'm looking at total rent to the government from the deal, if you like, starting in year one, starts at 28 million.
Mr. Nelligan: Then in the next paragraph on page 5, he recites the deferral that we've been talking about. He said:
The result is that the actual rent in years 2, 3 and 4... will be substantially less than the $26 million... obtained... from the same facility in fiscal 1993.
Do you agree with that calculation?
Mr. Desmarais: Yes, sir.
Mr. Nelligan: Then he refers to:
In the calculation of gross revenue... there are 10 deductions which I am advised are unusual...
I haven't been able to identify them. Do you know what they are?
Mr. Desmarais: Yes, sir.
Mr. Nelligan: What are they?
Mr. Desmarais: I don't think I can rhyme them off, but if you go to the lease document itself, in the definition of "gross revenue", you will see a list of deductions from gross revenue. They include things like bad debts, commissions paid back to concessionaires, and so on, that are excluded from the definition of "gross revenue".
Mr. Nelligan: Well in your view as a negotiator and, Mr. Jolliffe, your view as a financial man, were you concerned that any of the deductions permitted under gross revenue were unusual in commercial transactions?
Mr. Jolliffe: I didn't think they were unusual in commercial transactions. That was the arrangement. We had gone through those items and reviewed them and agreed to them as being deductions from the gross revenues.
Mr. Nelligan: Did you discuss those with Mr. Nixon?
Mr. Jolliffe: I have never had any discussions with Mr. Nixon.
Mr. Nelligan: Did you, Mr. Desmarais?
Mr. Desmarais: I had a quick discussion with Mr. Goudge over that wording, and Mr. Goudge said that he had been informed by other lawyers that it was unusual, and I accepted that.
Mr. Nelligan: All right, but in the course of negotiations - and perhaps I can bring Mr. Rowat in on this - was there any consideration by the government team that these deductions were unusual?
Mr. Rowat: No. The advice that I had was that they were acceptable.
Mr. Nelligan: Then there is this question about a first-class air terminal. I gather that was a matter of some discussion between yourselves and T1T2. We're still on the same page, page 5.
Mr. Desmarais: I believe you're talking about the paragraph that starts "The obligation to maintain and upgrade"?
Mr. Nelligan: Yes, that's right.
Mr. Desmarais: I believe that - no. I'm going to have to get you to repeat your question.
Mr. Nelligan: I'm simply saying was this the subject of some negotiation with the developer, the question of a first-class air terminal?
Mr. Desmarais: Yes, it was one negotiating point that took quite a while to resolve.
Mr. Nelligan: And he says:
This obligation is subject to the qualification that the Tenant be able to recover its cost together with an investment return...
Did you feel that this in some way modified the requirement for a first-class air terminal?
Mr. Desmarais: I believe, sir, if you go to the lease and look up this obligation, and it's a separate section of the lease - I can't remember what number particularly - you will see that the obligation is in three parts. The only part that requires revenues to be guaranteed by airline leases, and so on, is an obligation to upgrade the facility, add new structure, expand the building envelope, if you like. The requirement to maintain the facility and use moneys to maintain it in a first-class state throughout its life in the state it was built, but a first-class state, is not subject to that obligation. Then there's another part to it, but I can't recall it right off the top.
Mr. Nelligan: So were you satisfied as the negotiators that they were the persons responsible for maintaining it as a first-class air terminal?
Mr. Desmarais: Yes, sir.
Mr. Nelligan: With regard to the passenger threshold, we have heard the discussion on 33 million. Did you discuss that with Mr. Nixon?
Mr. Desmarais: Yes, sir.
Mr. Nelligan: And did you explain why you reached the 33 million figure?
Mr. Desmarais: Yes.
Mr. Nelligan: There is a reference later on by him to something in the Treasury Board submissions as to the 30 million number. Perhaps I will come to that when we come to it.
Did you see any problem - I'm now on page 6 - with the right of the tenant to enter into leasehold mortgages? This is the leasehold mortgage paragraph, page 6.
Mr. Desmarais: I believe we had several discussions with Treasury Board on the leasehold mortgage provisions, and they had agreed with the provisions as they were in the lease. That is a fair summary, I guess, of what was in the lease and the leasehold mortgages.
Mr. Nelligan: Would there be a problem if the Government of Canada was required to consent to assigning by the mortgagee of leases or sublets?
Mr. Desmarais: I'm not sure where you are.
Mr. Nelligan: This is still in the same paragraph.
Mr. Desmarais: What sentence?
Mr. Nelligan: The sentence reads as follows:
If the mortgagee enforces its security it need not complete further stages... and no consent of the Government of Canada is required if the mortgagee assigns, leases or sublets the premises.
Mr. Desmarais: We had no problems with that.
Mr. Nelligan: Did you discuss it with Mr. Nixon?
Mr. Desmarais: I don't believe we discussed the leasehold mortgage provisions. At least I didn't. Other people may have.
Mr. Nelligan: In dealing with the question of the PFCs, which is the last paragraph on that page, do you agree with that paragraph?
Mr. Desmarais: Yes, sir.
Mr. Nelligan: What was the trigger that would permit a PFC to be introduced?
Mr. Desmarais: Air Canada becoming a defaulting air carrier as defined in the agreement, which basically meant that Air Canada had to be bankrupt.
Mr. Nelligan: So it was in that case only.
Mr. Desmarais: Yes, sir.
Mr. Nelligan: On page 7, there is the reference to the requirement of the government to contribute to T1 operations if the operational costs or capital costs exceed 15 million. Then it says:
The RFP provided for no Government payments.
Can you explain how that provision was introduced into the agreement?
Mr. Desmarais: Yes, sir. The RFP did not specifically exclude the closure of T1. The proposals we received from both proponents required the closure of T1 at some point. It was the contention of the government negotiators that you could not lose that capacity for any length of time, and you needed to maintain it until - and when you did lose it, lose it for the shortest period of time. So we wanted Terminal 1 to remain open as long as possible and then be out of service for as short as possible.
In doing that, we recognized that the partnership would have to expend funds on keeping it open for the eight- to ten-year period that was going to be required. As I say, both proposals had shut it down very early.
So we looked at it and said on the processor part of Terminal 1, "You, T1T2, agree to spend $15 million. If you spend more than that on the terminal processor part of T1, we will contribute one-third in order to maintain that facility open."
It excluded the parking garage. This is a little bit misleading in that it says Terminal 1. Terminal 1, as we all know, includes a parking garage. Our estimate of keeping the terminal processor part open for the eight to ten years at that time was, I think, $11 million. So we had built in a cushion of 4 million and were looking at no obligation, we hoped, in the future.
A problem did arise if stages didn't get triggered.
Mr. Nelligan: Did you explain that to Mr. Nixon?
Mr. Desmarais: I believe we went through the lease with Mr. Nixon and went through that type of thing.
Mr. Nelligan: Then there's a paragraph on "Non-Arms Length Transactions". There's a reference to non-arm's length parties entering into contracts. First of all, what was the anticipation of the government bargaining team as to when the developers would start entering into contracts with subcontractors on this matter?
Mr. Desmarais: As part of the closing agenda, we required the partnership to disclose all signed, non-arm's length agreements to us before signing, if you like. It was a precondition of closing. They did that with the Allders lease and the two Bracknell agreements they had in place. There were no other signed agreements at that time, according to the partnership, and there was no obligation to disclose non-construction type contracts after the closing date. For construction contracts, if they were non-arm's length, they had to be disclosed as Part I of the clauses in the development agreement. It required them to disclose those to us.
Mr. Nelligan: Is it in fact, then, that they violated the agreement by entering into one contract with Matthews Construction and did not disclose it?
Mr. Desmarais: As far as I know, sir, there was no signed contract with Matthews Construction to the day of cancellation.
These contracts Mr. Nixon is referring to here, I believe, are an interpretation of the partnership agreement where the partnership agreement - one of its schedules says that the following contracts will be entered into or exist - implies they exist. That partnership agreement was signed on October 4th, I believe. So Mr. Nixon and his legal advisors made the assumption that there were valid agreements in existence on that date. They were not given to us, and in subsequent actions on the cancellation, we have determined that there were no signed agreements up to the point of cancellation with Matthews Construction.
Mr. Nelligan: So he was mistaken on that, and you found that out in your subsequent litigation?
Mr. Desmarais: Yes.
Mr. Nelligan: With regard to non-arm's length contracts, was there any stipulation in the agreement controlling the prices which could be paid?
Mr. Desmarais: Basically all non-arm's length contracts had to be entered into on commercial terms, and this is especially true of the construction contracts. They were a default provision.
Mr. Nelligan: With regard to pricing to the airlines, it says:
Clearly, costs to the airlines for the use of T1 T2 will rise very substantially by comparison with today.
How does that compare with what you have said recently that the costs would be competitive with T3 and other airlines?
Mr. Desmarais: Mr. Nixon, I believe, is comparing the costs today of T1T2 to the costs of what they will be tomorrow in T1T2. I think as I testified last week, the costs in T1T2 today are in the order of $2.84, and they would rise to T3 rates, which are in the range of $7.
Mr. Nelligan: And which would be closer to the market figure?
Mr. Desmarais: The market figure depends, sir. The market figure for new world airports now is running in the $7 to $8 range. Realize that $700 million of construction that is going to be cost recovered from the airlines is going to drive rental rates up substantially. Even the base case we were looking at yesterday showed that our rates would have to increase to around the $7 range if we operated the facility.
Mr. Nelligan: Would you look at page 8, please, first of all, the first paragraph under number 3. In your view as negotiators, was the privatization inconsistent with the policy announced in 1987?
Mr. Desmarais: I don't believe this deal is inconsistent with the 1987 policy. The 1987 policy, as I think has been pointed out, had two parts. One was the private transfer of airports to others, the total airports to others. There was a second part to that policy statement that says where the government maintains the airport, it will seek out innovative commercial opportunities. I think under that part of the policy - this would fit under that part of the policy.
Mr. Nelligan: Did you explain that to Mr. Nixon?
Mr. Desmarais: No, sir, I did not.
Mr. Nelligan: Did he ever ask you the question?
Mr. Desmarais: No, sir.
Mr. Nelligan: Then it says:
The RFP having as it did only a single stage and requiring the proponents to engage in project definition... all within a 90 day time frame, created... an enormous advantage to a proponent that had previously submitted a proposal for privatizing and developing T1 and T2.
Was Mr. Nixon aware that the Claridge Group also had access to a proposal which had been filed unsolicited by its predecessor in title at T3?
Mr. Desmarais: I'm not sure, sir.
Mr. Nelligan: In your view, was there any similarity between the proposal submitted back in the early days by the Matthews Group and the type of proposal which would be required under your RFP?
Mr. Desmarais: As I said yesterday, and I think to a question from Senator Hervieux-Payette, that the unsolicited proposal we received were very thin volumes, almost pre-feasibility studies as the senator characterized them. What we received in the proposal call was 10,000 pages of documentation, give or take a few thousand.
Mr. Nelligan: Even in the small proposal you received at that time, how many of the aspects that you required in your RFP would it have covered?
Mr. Desmarais: I am not sure, senator, because we didn't use it as a guide for the RFP. We did look them over, as you pointed out yesterday, for policy issues, but that was as far as it went.
Mr. Nelligan: Then it says:
...that no financial pre-qualification was required in this competition.
What requirements were there in the RFP as to financial pre-qualification?
Mr. Desmarais: I would have to go check the RFP. I believe the RFP required that the government or the proponent have its financing in place on signing the deal, but there were qualifications in the business plan and in the proponent's qualifications to list what their assets were and to show whether they had the wherewithal to do the project.
Mr. Nelligan: Now would you turn, please, to page 9. They talk about the role of patronage, and they refer to a Mr. Donald Matthews. Were any of you ever made aware of any predisposition of the government or the department to any particular bidder at any time from the announcement of policy in 1987 until the execution of the policy in 1993 of the agreement?
Mr. Rowat: No.
Mr. Desmarais: No.
Mr. Nelligan: In the course, Mr. Jolliffe, of your early assessment proposal, did anyone suggest to you, either a civil servant or lobbyist or otherwise, that someone was to be given the edge?
Mr. Jolliffe: Absolutely not, sir.
Mr. Nelligan: Then they refer to Mr. Jelinek. Did any of you have any dealings with Mr. Jelinek?
Mr. Jolliffe: No, sir.
Mr. Desmarais: No, sir.
Mr. Nelligan: Then under the "Role of Lobbyists", it says:
It is clear that the lobbyists played a prominent part in attempting to affect the decisions that were reached, going far beyond the acceptable concept of "consulting".
Did you discuss that aspect of it with Mr. Nixon?
Mr. Desmarais: No, sir, I didn't.
Mr. Nelligan: Did he ask you any questions about it?
Mr. Desmarais: No, sir.
Mr. Rowat: Mr. Nixon - I met, along with Ran Quail and David Broadbent - the three of us met with him for lunch at Transport Canada on November 15th when he asked us about what lobbying each of us as individuals had experienced. My answer was that I had not experienced any lobbying during my tenure.
Mr. Nelligan: You were there, and what did the others indicate?
Mr. Rowat: Same thing.
Mr. Nelligan: Then it says:
When senior bureaucrats involved in the negotiations for the Government of Canada feel that their actions and decisions are being heavily affected by lobbyists, as occurred here, the role... in my view, has exceeded possible norms.
Were you included in that group of senior bureaucrats?
Mr. Desmarais: As I said, I had never had any contact with lobbyists, so I'm obviously not on that senior list.
Mr. Nelligan: Maybe both of us will get promoted the next time.
Mr. Jolliffe: I don't consider myself a senior bureaucrat, sir.
Senator Kirby: Good answer.
Mr. Rowat: I'm a senior bureaucrat, and the answer is "no".
Mr. Nelligan: Then it says:
...there was a perception that political staff were interested in this transaction to a highly unusual extent.
Were any of you aware of such interest?
Mr. Rowat: During my tenure, relations with the minister's staff were normal.
Mr. Nelligan: Mr. Desmarais?
Mr. Desmarais: I believe the relations with the minister's staff throughout my whole relationship here with this were normal. They would ask questions in the normal course of events, but there wasn't daily calls from their office saying where are you, or anything like that.
Mr. Nelligan: Mr. Jolliffe?
Mr. Jolliffe: Same opinion, sir.
Mr. Nelligan: Then it says:
...this climate of pressure resulted in several civil servants being reassigned...
I will deal with that first. Are any of you aware of civil servants being reassigned with respect to this particular contract?
Mr. Desmarais: I think we are all aware of, as Mr. Broadbent put it, Mr. Barbeau's gardening leave, but that's the only one I'm aware of.
Mr. Rowat: Same.
Mr. Jolliffe: Same here.
Mr. Nelligan: Then did any of you request a transfer?
Mr. Desmarais: No, sir.
Mr. Jolliffe: No, sir.
Mr. Nelligan: Are you aware of anyone else requesting a transfer?
Mr. Jolliffe: No.
Mr. Nelligan: Would you turn to page 11, please. It says:
The revenue stream provided to the Government of Canada by this agreement is far from overwhelming. In the immediate term, the rentals received will in fact be less than in recent years. As the lease unfolds, the rental stream is highly dependant on aggressive pricing conducted essentially without government control and at the risk of making Pearson uncompetitive with competitor airports...
May I have your comment on that? Do you agree or disagree with that statement?
Mr. Desmarais: I think that we would probably disagree with the statement in large part.
Mr. Nelligan: All right. To what extent do you disagree?
Mr. Desmarais: I believe, "As the lease unfolds, the rental stream is highly dependant on aggressive pricing conducted essentially without government control...", we had controls on the pricing to airlines in the management and operations plan. We also had set limits on what concessionaires could charge in the management and operations plan. So there was some control on the pricing aspects of it.
So I would not agree that there was no government control. I don't believe with the deal we had we were making Pearson uncompetitive with airports in Canada and the U.S.
Mr. Jolliffe: More specifically, sir, the pricing controls related to the IKO guiding principles for pricing services to airport operators.
Mr. Nelligan: And with regard the revenue stream, as I understand Mr. Rowat, you did have a base model. How did the revenue stream compare with your best efforts as a government operated airport?
Mr. Rowat: The revenue streams from this exceeded the revenue stream from our base case model.
I should point out that Mr. Nixon is correct when he says:
In the immediate term, the rentals received will in fact be less than in recent years.
That reflects the fact of the $11 million being deferred to be repaid over the following 10.
Senator Jessiman: But on your books, the 11 million was showing as a debt.
Mr. Rowat: Yes, basically.
Mr. Nelligan: The next paragraph says:
...I have been advised by my business valuation advisor the rate of return... could, given the nature of this transaction, well be viewed as excessive.
Was that the opinion of the departmental experts?
Mr. Rowat: The departmental experts, as well as our outside expert, Mr. Stehelin, said that the rate of return fell within an appropriate range.
Mr. Nelligan: All right. Did you discuss that with Mr. Nixon?
Mr. Desmarais: We did not discuss it with Mr. Nixon. We discussed it with his business advisor. We had Paul Stehelin discuss it with his business advisor as well.
Mr. Jolliffe: It was at this point I had my only conversation with Mr. Rollit if Crosbie and Company, and later with Mr. Crosbie, particularly around this rate of return question.
Mr. Nelligan: Did you explain your position to him at that time?
Mr. Jolliffe: Yes. We went through calculations of the rate of return and the pre- and post-tax situation.
Mr. Desmarais: Mr. Stehelin did explain to him, by the way, on the phone the rates of return for utilities that we were using as a model.
Mr. Nelligan: I think Mr. Crosbie did not feel those rates were available.
Mr. Desmarais: I'm not sure what Mr. Crosbie felt.
Mr. Nelligan: In any event, I wonder, Mr. Desmarais, if you could give us a few moments of the opinions you have expressed in other litigation - the rate of return notwithstanding - as to the risk which was being incurred by the developer as to having any return at all?
Mr. Desmarais: I believe I said in my cross-examination for the litigation that occurred last January that the risks were of such an extent that there was the possibility that this development would not make any money.
Mr. Nelligan: So that the rate of return might have been zero?
Mr. Desmarais: Yes, sir.
Mr. Nelligan: And that is what your present opinion is? At least, that's the opinion you filed in the litigation?
Mr. Desmarais: That is still the opinion, sir.
Mr. Nelligan: Page 12, please. It says:
The agreement provides only modest constraint against self dealing... The agreement provides no ability to modify non-arms length contracts in existence before October 7, 1993.
Would you tell me, please, what controls you put in to cover this aspect?
Mr. Desmarais: Prior to October 7th? That's the one you are asking for?
Mr. Nelligan: Yes.
Mr. Desmarais: During the course of discussions with Mr. Nixon, he identified this as a point. I discussed it with Peter Coughlin of T1T2 Limited Partnership and PDC. They provided me with a letter agreement that any of the contracts signed before October 7th or any of the non-construction contracts, in fact, that were signed at non-arm's length would be subject to the clause in the development agreement applying to the construction contracts, non-arm's length construction contracts.
He provided me that letter, I believe, around the 21st or 22nd of November. A copy of that letter was given to Mr. Nixon and also filed with our legal registry as part of the deal.
Mr. Nelligan: In any event, what was the limitation on the one signed after October 7th with regard to pricing?
Mr. Desmarais: That basically it had to be on commercial terms.
Mr. Nelligan: All right.
Thank you. Those are all my questions.
Senator Jessiman: Chairman, I think in view of what counsel has done, I don't think I'm going to ask any questions.
Senator Tkachuk: I have a quick supplementary.
Could you just each of you say how much time you spent with Mr. Nixon or his representatives?
Mr. Rowat: If I can start, I spent the Monday or Tuesday of November 1st, about two hours - maybe a little more - going through with my colleagues the original deck of October 29. That was the only time that I spent with him until he met with us for lunch with the three negotiators, Ran Quail, Broadbent and myself. That was just over a lunch in the middle of the month, middle of November, for about an hour.
Senator Tkachuk: Was that November two hours, November 1st, were you alone?
Mr. Rowat: No, I had Mr. Desmarais and Mr. Power with me.
Mr. Desmarais: I would have spent - and I'm just guessing now - roughly 18 hours with Mr. Nixon or his advisors. The November 1st meeting was one meeting. I had subsequent meetings with Mr. Goudge's advisors and our legal counsel on the deal to explain some of the aspects of the deal to his legal advisor.
I then met with Mr. Rollit and Mr. Crosbie for, I believe, two days to go over what we called the KPMG model run, which is their plan they had given to us on August 23rd. We explained that to Crosbie. Then I spent another day or two in his office. I didn't have meetings with anybody, but they would bring me the odd page of this report to check for factual content.
Senator Tkachuk: Just so we're all clear, the 18 hours is in total, or is there -
Mr. Desmarais: That's roughly the totals.
Senator Tkachuk: That's with both Mr. Nixon and -
Mr. Desmarais: His advisors.
Mr. Jolliffe: On my part, it was with Mr. Rollit, who worked with Mr. Crosbie. So I had a telephone conference call with Don Dickson, who was my co-chair on the business plan, around the issues of the rates of return. That telephone conference call was towards the end of November, which was probably around a half hour. I think a day following that, we had another 15-minute conversation with Mr. Crosbie on the same subject, but in a little bit more detail.
Senator Tkachuk: When you said you worked in an office, you would be getting pages. Could you tell me what pages they would be?
Mr. Desmarais: I believe, senator, I saw the pages basically on where he's discussing the lease and the calculations and so on. So up to, I believe, page 4, 5, and the first part of page - or page 6, page 7, and up to page 8 - the part on pricing policy were the pages I saw. I didn't see anything other than that.
Section 3, which is comments and opinions on the process and so on, I didn't see. So all I was asked to do was comment on what he said about the deal.
Senator Tkachuk: And the financial advisor, Mr. Crosbie, were you aware of the firm previously? Would they have any expertise in airport financing? Were you aware of them?
Mr. Desmarais: I was not aware of them until I met them in Mr. Nixon's office.
Mr. Jolliffe: I was aware of them from other work I've done in the financial community, but not aware of them as particularly operating in the airports area.
Senator Tkachuk: Okay.
Mr. Jolliffe: I should add that Mr. Dickson did have other discussions with Mr. Crosbie beyond the conversation that I had with Mr. Dickson. So there would be other times.
Mr. Desmarais: I should mention that one of the meetings that I had with Crosbie and Company, I was accompanied by Mr. Don Dickson to that meeting. Mr. Dickson met subsequent to explain further -
Senator Tkachuk: Were there documents given to them?
Mr. Desmarais: Basically the August 23rd base case, if you like, which was provided by the other side to us to update their business plan, was provided to Crosbie and Company.
Senator Tkachuk: Did they have any others, or that was the total amount?
Mr. Desmarais: They had access to the total agreement in the sense that Mr. Nixon had a complete set of closing documents.
Senator Tkachuk: Who hired them?
Mr. Desmarais: Mr. Nixon, as far as I know.
Senator Tkachuk: So what department would they have paid them out of?
Mr. Desmarais: I believe the PCO hired Mr. Nixon, and I'm not sure if PCO hired Mr. Crosbie or Mr. Nixon hired Mr. Crosbie under his contract with PCO.
Senator Lynch-Staunton: Same contract.
Senator Tkachuk: That's all I have.
Mr. Chairman: There remains nothing but to thank you very much, gentlemen, for your very helpful and forthcoming testimony.
Senator Tkachuk: I have one question. The Richardson Greenshields report, did Crosbie have that?
Mr. Jolliffe: There wasn't a Richardson Greenshields report. Richardson Greenshields participated in the evaluation process of the business plan. So that was an input to the evaluation. There is no Richardson Greenshields report as such.
Senator Tkachuk: So he would have had access?
Mr. Jolliffe: He would have had access to that through the other documents.
Mr. Desmarais: Can I say something about that?
We contacted Richardson Greenshields at the time to see if they would discuss it with Mr. Nixon. They wanted a contract to do that. We asked Mr. Nixon if he was willing to fund that out of his contract, and he said he didn't think they were necessary.
The Chairman: It's 2 o'clock this afternoon and not 1:30 as shown because we've gone over our time.
The committee adjourned until 2 p.m.
Ottawa, Wednesday, August 16, 1995
The Special Senate Committee on the Pearson Airport Agreements met this day at 2:00 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: Come to order, please. We have four distinguished witnesses with us this afternoon, and before you are introduced by the counsel to our committee, Mr. Nelligan, I would like to thank you for appearing and tell the committee that these gentlemen would like to, if possible, not be delayed this afternoon past 5 o'clock or quarter to 5 or about that time.
Senator Kirby: They want the plane to leave on time?
The Chairman: I assume you've made passage, you have your tickets. You know the way it works.
So Mr. Nelligan will introduce our witnesses, following which the clerk, as has been our custom, will swear you.
Mr. John Nelligan, Counsel to the Committee: Senators, this afternoon, we have a group from Air Canada. The first witness, rather, in the order as printed here, is Dominic Fiore who is now retired but was senior director of corporate real estate and was largely involved in the contacts between Air Canada and the government relating to the Pearson contract.
Senator Kirby: Just to make it easy for us, could whoever is -
Mr. Nelligan: Mr. Fiore is second from the end.
Senator Kirby: It is just that we would like to put the name to a face. Thank you.
Mr. Nelligan: And then Mr. Lamar Durrett who is executive vice-president, corporate services; Mr. Cameron Desbois who is vice-president and general counsel; and Mr. David Robinson who is now director, corporate real estate.
(Mr. Fiore, sworn:)
(Mr. Robinson, sworn:)
(Mr. Durrett, sworn:)
(Mr. Desbois, sworn:)
The Chairman: I understand, gentlemen, that Mr. Durrett is going to open the presentation this afternoon. We thank you very much for sending us this. We sometimes do not get the testimony in the nice form you have presented it to us. We appreciate that very much.
Mr. Durrett, would you start please?
Mr. Lamar Durrett, Executive Vice President, Corporate Services, Air Canada: Thank you, and good afternoon, chairman and senators. We thank you for inviting Air Canada to offer our perspective on this important issue.
My name is Lamar Durrett. I represent Air Canada. My colleagues were previously introduced, so we will dispense with that again.
I'd like to begin by putting Air Canada's interest in the development of Pearson airport into perspective. Pearson is the single most important airport in Air Canada's system. Together with our connector carriers, 40 per cent of Air Canada's flights begin, terminate or connect at Pearson every single day. This translates into 220 flights a day and 10 million passengers each year, to and from dozens of domestic, U.S. and international designations. In fact, Air Canada accounts for almost half of Pearson's total passenger departures annually.
I should also attempt to convey the very significant contribution Air Canada makes to the economy of the greater Toronto area.
Air Canada and our subsidiaries employ almost 6,000 people in the greater Toronto area, and we spend almost $800 million annually in support of our operation at Pearson. With spin-offs, Air Canada's contribution to the Ontario economy is probably in the range of $1.5 billion a year. The greater Toronto area is home to Air Canada's largest pilot and flight attendant bases, our largest cargo operation, our largest reservation centre, extensive aircraft maintenance facilities and our system operations control centre for the entire network world wide, and our main pilot training base.
All to say that the future of Pearson airport and the future of Air Canada are totally linked. The efficiency and cost effectiveness of our Pearson operation plays a critical role in our efforts to build a continental hub in eastern North America.
Our competitors and Pearson's competitors in this regard are well known. Airport communities in Chicago, Pittsburgh, Detroit, Cincinnati, and other cities and centres within a stone's throw of Toronto have made strategic decisions in recent years to invest billions of dollars in airport infrastructure. Pearson has a lot of catching up to do, and we are already several years behind.
Because of Pearson's importance to Air Canada, it is critically important that Pearson's terminal facilities and runways are developed well ahead of demand to operate in a cost-effective manner and to provide superior customer service.
That is why, after protracted and difficult negotiations, Air Canada supported and signed a long-term lease agreement with Pearson Development Corporation to redevelop Terminals 1 and 2.
Today, Air Canada urgently requires terminal redevelopment. If I can convey one message to you today, it would be this: Air Canada believes that Pearson airport is uniquely positioned to become a preeminent North American gateway hub.
But there is a serious crisis looming for Air Canada at Pearson. We must find a way to redevelop our terminal facilities at Pearson very soon, if we are to remain competitive and continue to expand our operations to the benefit of the economy of southern Ontario and the rest of Canada.
To address Air Canada's involvement in the Pearson terminal development project, I believe it would be most useful if Dominic Fiore were to outline Air Canada's position. As the most senior official directly responsible for all facilities, Mr. Fiore negotiated the lease agreement Air Canada reached with Pearson Development Corporation and is the most knowledgeable person at Air Canada on the surrounding particulars.
Mr. Dominic Fiore, (Retired) Senior Director, Corporate Real Estate, Air Canada: Thank you, Lamar.
Air Canada has been at Terminal 2 since 1972 when, as a Crown corporation, we were asked to leave the more popular Terminal 1 and set up our operations in an untested and somewhat underdeveloped building that I recall was viewed by the travelling public without a great deal of enthusiasm.
Over the years, Air Canada invested approximately $125 million in improvements to the terminal in order to increase the efficiency and improve customer service. I should note that this is considerably more than all the carriers have collectively invested in all three terminals at Pearson.
In late 1980s, as our facilities in Terminal 2 became constrained and uncompetitive, Air Canada developed a two-phase airport master plan that provided for the early refurbishment of the domestic wing, with the U.S. and international wings to be part of a phase 2 development in the mid 1990s.
However, in 1989, it was clear that Transport Canada was no longer in a position to provide the hundreds of millions of dollars in new capital for the necessary renovations. Instead, Air Canada came forward with a partnership proposal in which we would invest $65 million, three quarters of the cost of the total improvements to Terminal 2 domestic wing, the balance being paid by Transport Canada.
Air Canada proposed this approach, even though we were not owners of the facilities and had only eight years left on our lease. In exchange for absorbing the lion's share of the investments in the rented facility, Air Canada and Transport Canada agreed to terms and conditions for a long-term lease on Terminal 2. The terms and conditions are referred to as the guiding principles for the Air Canada lease negotiations which are dated July 26 and signed, I believe, on August 1989.
Work began in late 1989 to upgrade the domestic arrival and departure area of Terminal 2. The work was completed in 1991 and it is no doubt familiar to senators who travel, who are Air Canada customers - have seen the difference.
No agreement was reached, however, between Air Canada or Transport Canada on how or when phase 2 of our refurbishment could be funded.
During that period, Air Canada received unsolicited proposals from a number of developers interested in underwriting the next phase of our upgrades, which would cost an additional $250 million.
At the time, Air Canada did prefer the Paxport proposal on the basis of both cost and efficiency. With Transport Canada unable to fund further improvements to their facility, Air Canada and Paxport agreed to recommend to Transport Canada a development plan for phase 2 of Terminal 2 redevelopment.
Of course, 1990 was the year the recession hit the airline business in Canada and around the world like a tidal wave. Air Canada began a very difficult process of cutting costs and downsizing. We dropped marginal routes, sold aircraft, deferred all capital expenditures and began laying off thousands of employees. Phase 2 of the terminal refurbishment was also downscaled from $250 million to $160 million and postponed until an improvement was apparent in Air Canada's finances.
While Air Canada was in the early stages of downsizing, the federal government announced its intention to issue a request for proposal to redevelop Terminals 1 and 2. They also requested Air Canada's input on further improvements to Terminal 2 in order to provide specifications to interested bidders.
While we provided our phase 2 plans, we, nevertheless, asked that the government postpone the request for proposals in light of our difficult financial situation and our inability to absorb higher terminal operating costs. In the end, however, we believed that our long-term interest in Terminal 2 would be protected by the guiding principles document.
When it became evident that the government intended to issue a request for proposals and run a competitive bid process, Air Canada terminated its association with Paxport.
During the request-for-proposals period, Air Canada was approached by all the bidders to provide more information on our facilities requirements and priorities. We provided this information on an arm's-length basis.
Paxport was chosen by Transport Canada as the best overall proposal in December 1992. Air Canada was then invited to attend a presentation to hear the contents of the winning bid. The inclusion of Terminal 1 in the project had, in fact, raised the capital cost of the total project to a point where Air Canada's future operating costs would be non-competitive. Moreover, the proposal failed to reflect the guiding principles established with Transport Canada for Air Canada's long-term lease on Terminal 2.
Air Canada, as the largest tenant, began discussions with Paxport. While we still needed to plan for our transborder and international refurbishment, we made it very clear to Paxport, and subsequently to PDC, that we could not support their proposal as it stood.
I spent many weeks in 1993 negotiating with PDC and in discussion with Transport Canada to ensure the current lease applied until its expiry in May 1997.
When we reached the point where our current and future lease arrangements were being honoured and PDC's expenditures were in line with our needs, I recommended the lease package to Air Canada's management team.
Despite the fact that our costs would rise substantially after our current lease expired, Air Canada needed and, I believe, still needs to make their improvements in order to develop its network and its operations. Our costs would not be out of line with airlines operating out of Terminal 3 or at competing U.S. hub airports.
In the final analysis, after a great deal of difficult negotiations, Air Canada supported the proposal. It was the next best alternative to Air Canada actually being an equity partner, and it allowed us to make very necessary improvements at a fair cost.
Perhaps it would be appropriate at this juncture if my former colleague David Robinson would take up at the point where the PDC lease was cancelled.
Mr. David Robinson, Director, Corporate Real Estate, Air Canada: The December 1993 cancellation of the agreements between Transport Canada and Pearson Development Corporation also negated the lease between PDC and Air Canada. At that point, we realized that what lay ahead was a very difficult period of uncertainty about the long-term redevelopment of Terminal 2.
The most successful airports in the world, such as Schiphol Airport in Amsterdam and Changi Airport in Singapore, have achieved their success for one very important reason. They stayed ahead of the demand curve by developing terminals and runways well in advance of anticipated passenger demand. We have all but lost that opportunity at Pearson to the detriment of Air Canada, other carriers, the Pearson community and the local economy.
In the last two years, Air Canada has undertaken an ambitious plan to modernize our aircraft fleet. By 1998 we will have one of the youngest, most fuel-efficient, passenger- and environmentally-friendly fleets in the word. Regrettably, our premiere airport facility, the jewel in Air Canada's crown, has not kept pace.
The ideal time frame to have commenced the redevelopment of Terminal 2 was in 1993 while passenger numbers were down. Carrying on construction around existing facilities is less than ideal under any circumstances, but the disruption to the travelling public would have been substantially less compared with the impact it will have today and in the future.
I would note for senators that the Open Skies agreement, an important accomplishment of the current government, will generate 50 per cent more transborder passengers in Terminal 2 over the next three years.
Open Skies was not anticipated when the request for proposals was issued in 1992. And while we welcome the new business that it will generate, we must have the facilities to handle this new traffic.
As a result, Air Canada recently made a strategic decision to invest a further $35 million in essential enhancements to the transborder area of Terminal 2 that, by now, would already have been completed under the PDC redevelopment plan. This interim fix represents a portion of the phase 2 improvements that Mr. Fiore referred to in his remarks.
This investment, while limited in scope, will permit us to add four additional transborder jet gates, provide an off-site area for six Canadair jets, install a new baggage system, and increase our passenger-processing capabilities through an expanded check-in area, as well as enlarged Canada and U.S. customs and Immigration facilities.
This project will take about 24 months to complete due to the restrictions of how we must phase this work around the ongoing operation of Terminal 2. Two years is a long time to complete this work. At that point, our options for future development of the transborder and international sectors of Terminal 2 will be very limited.
To properly serve our customers and to remain competitive, Air Canada needs modern airport terminal facilities, comfortable waiting areas and lounges, sufficient capacity to process passengers and baggage, shops and amenities catering to the travellers' needs and in-transit facilities that will allow us to bring passengers through Toronto from Europe and the Far East en route to points in the United States.
Given the length of the time required to plan and develop new terminal facilities and the rate of growth of our traffic at Pearson, Air Canada should already be well into our original phase 2 development. Instead, we are undertaking interim measures that will buy us, at best, two to three years.
Mr. Durrett: Mr. Chairman, if I could make a few comments in summation, this is an exciting time for Air Canada. We are launching new transborder and international services at a furious pace. Under Open Skies, we have already introduced new services from Pearson to Atlanta and Washington, D.C. and have announced new services from Toronto, to Denver, Minneapolis and St. Louis.
On the international front, we have introduced new services from Toronto to Osaka, New Delhi, Seoul, and Tel Aviv. New flights from Toronto to Hong Kong and Brussels will be launched in the coming months.
We have received government designation to serve Madrid, Singapore, Moscow and Johannesburg from Toronto, and in due course, we will announce how we plan to serve these new routes.
Finally, we have forged strategic alliances with Continental Airlines, United Airlines, Air France, Korean Airlines and others that are generating even more incremental revenue at our major hub.
As David Robinson suggested, Toronto's central location, large local market and proximity to the U.S. make Pearson an ideal transit point for passengers travelling between the U.S. and Europe, Latin America and Europe, and North America and Asia, particularly with advent of Open Skies.
Unfortunately, we are falling farther and farther behind in our ability to cope with the growing demand in our terminal facilities.
I might add that our capacity problem at Toronto is not just related to terminals. In September of this year, the main east-west runway will be taken out of operation for temporary repairs. This will cause significant delays at Pearson affecting all airlines and the entire travelling public.
To my knowledge, every other major North American hub airport has sufficient air-side capacity to deal with a similar type problem.
In conclusion, Air Canada has over the years clearly demonstrated its commitment to Pearson airport and, in particular, to Terminal 2. With our latest capital project in the transborder area, we have invested over $160 million in improvements to this important facility. No other Canadian or foreign carrier has made this level of investment in any Canadian airport.
Air Canada has cooperated with governments at all levels on a wide range of issues surrounding Pearson airport from runways and terminal development to ground transportation and air traffic control. And we have expressed our willingness to work with Transport Canada and the Greater Toronto Airport Authority in bringing about necessary enhancements at Pearson.
However, the transfer process at Pearson is a lengthy and complicated one. Significant amounts of time will be required for Transport Canada and the new authority to negotiate a lease and to effect the turnover. In the meantime, Air Canada wants to do all it can to speed up development and to ensure that Pearson realizes its full potential.
Mr. Chairman, on behalf of my colleagues, thank you for the opportunity to present Air Canada's views, and we will now be pleased to take your questions.
The Chairman: Thank you, very much, gentlemen.
Now before we start the intensive questions, is there anybody that wants to ask short questions with regard to clarification of any of the statements so far? Just short questions before we get into the intensive questions.
Senator Hervieux-Payette: I have a short, nice question. Since we provided you with at least four minutes of advertisement at $50,000 a minute on television, this would pay almost the whole committee hearing. I hope you realize we are making a contribution to Air Canada for advertising all the new locations. This is a light note, but I think we appreciated your comments and taking the opportunity for your little campaign.
Mr. Durrett: Without Pearson, there would be no campaign.
The Chairman: Anybody else? Just short clarification questions on the opening statements before we get into intensive questions?
I have one. You've say that, in recent rears, you've invested billions of dollars in airport infrastructure, et cetera. "Billions" of dollars?
Mr. Durrett: I think it said millions, or it certainly should, senator.
The Chairman: I think we have "billions" here on page 3. That's a typo, eh?
Mr. Robinson: That is all airports. That is billions.
The Chairman: I see.
Mr. Durrett: Senator, that refers to the billions being spent by competing airports to Toronto to keep their facilities competitive.
The Chairman: I see. Thank you. Anybody else for clarification purposes?
All right, who is the first questioner? Senator Hervieux-Payette.
Senator Hervieux-Payette: I will be serious now.
Since we are trying to clarify and, as I say, not write history but at least refer as close as possible to the way the events have occurred, there is one question that really is very important, because we are talking about unsolicited proposals to the government and unsolicited proposals to Air Canada. Am I right?
There was an unsolicited proposal that was made for the redevelopment of Terminals 1 and 2 to Air Canada as well?
Mr. Fiore: That's correct.
Senator Hervieux-Payette: And to make that unsolicited proposal, I guess they had to discuss with you, either had a letter of intent, you had provided them with some information? Because I guess you don't make an unsolicited proposal without having the needs or the requirements of the customer.
So could you describe to us, how did they come up and arrive at an unsolicited proposal that was finally tabled officially to the Air Canada company? One day, you receive an unsolicited proposal, but you probably have talked to them and you have certainly contributed to this. Or you didn't talk, and they did all that on their own, coming up with a new concept and not having had any discussion with you? How did this happen and when?
Mr. Fiore: Well, senator, what happened was, a lot of the developers - Paxport was one of them, I think another one was Canadian Airports made up of BAA and a few other companies, who, at least - and ADC the other one was, the developer of Terminal 3.
They knew that we had a phase 2 of the redevelopment of Terminal 2. They knew about it. So they approached us unsolicitly, they wanted to know what our development plans were, and we shared that to them. We gave it, because they said they were going to make a presentation to Transport Canada because they felt like we did. They felt we were frustrated because, in all fairness to Transport Canada officials, they just couldn't have the funds to help us out to redevelop the terminal. That's how they got that information from us. They got the information from our phase 2 redevelopment plan.
Senator Hervieux-Payette: And when was the proposal made officially to Air Canada, of that unsolicited proposal to Air Canada?
Mr. Fiore: After reviewing, as I said, all the different proposals, these unsolicited, we selected Paxport. And I believe, going by memory, June 1, 1990, we signed a letter of expectation between ourselves and Paxport, and we supported that. We wrote to the government, at the same time they presented to the government, that we supported that proposal. And that letter of expectation pretty well listed all the terms and conditions of our guiding principles. We didn't call it that, but it was consistent.
Senator Hervieux-Payette: So at the time of this unsolicited proposal, there were, I would say, two phases. I mean, approaching you to see if you had an interest, and secondly, to put together that - some kind of a preliminary proposal to you, and finally coming to an agreement.
So it was not done in one day or one session or one month. It was a process that took place over - between the first day that you express an interest in having them make - to your group, because of the constraint of the Transport Canada people, then they proceeded with the unsolicited proposal.
Mr. Fiore: Eave got to make clear here that we never made any commitments to these people. First of all, they approached Transport Canada. We always informed Transport Canada of what was going on, the local Transport Canada officials.
So they approached us and we cooperated in giving the information to everybody equally. But we made no commitments that we were going to accept one or the other. We made it clear to them, this is unsolicited. They realized that Pearson had a major problem in facilities in Terminal 2 and Terminal 1.
Senator Hervieux-Payette: And in their unsolicited proposal, you were always a major partner of the proposal? I mean, you were not a tenant, you were also a part of the ownership?
Mr. Fiore: No, no, never. We had no equity whatsoever in that deal that we signed. No equity.
Senator Hervieux-Payette: But it was never contemplated?
Mr. Fiore: I think we had contemplated it, but, at that time, Paxport said no. And I think the airport, also, I'd like to add, I believe that Transport said no, too.
Senator Hervieux-Payette: That's the impression I had, that you were more or less not judged as being qualified, I mean, according to the policy of the time, to be owner and user; that your role was to be a user.
Mr. Fiore: That's correct.
Senator Hervieux-Payette: And, of course, those who were owning the facility should be a separate legal entity. Okay.
When Mr. Ray Hession of Paxport appeared before us, he gave us a document. I guess I have a copy of it. We are referring to the same documents over and over again, because we are trying to clarify. And in that memorandum of Mr. Hession to Mr. Matthews, I mean, he is referring - and I will read for you while it is being distributed - document A:
Doug Port called late yesterday afternoon to report on the Air Canada executive committee meeting that took place for three and a half hours that morning. The meeting was called as a result of our presentation last Thursday...
So the meeting I am talking about was April 24, for the memorandum, and I guess we are talking about a few days earlier. We are talking about April 1990.
It was devoted to the subject of Pearson development solely.
Air Canada management has concluded that it needs independent confirmation of the political assessment that I gave them last week...In particular, they want firm assurance that the government wants to fix Terminal 2 quickly and would favourably receive a proposal from Air Canada to accomplish that purpose.
In your opinion, what was this political assessment? I mean, does it mean - since this was something that was a preoccupation of Air Canada, what kind of political assessment were you talking about?
Mr. Fiore: I don't think I can answer. I don't really know. I don't know what he meant by that. That's the first time I see this.
Senator Hervieux-Payette: But it seemed that Air Canada management was requesting that it needs "independent confirmation of the political assessment that I gave them last week", meaning that the government would allow you to go ahead with that proposal.
Mr. Fiore: I guess maybe - I don't know if I can guess, but I guess, I suppose, would the government accept a proposal without going out on bid. I'm not sure, but I think that's what this was meant.
Mr. Durrett: But, clearly, none of us here were in this particular Air Canada meeting, and this is the first time we've seen this memorandum. So I'm not sure that we could adequately answer that question.
Senator Hervieux-Payette: But since the whole document relates to a meeting that took place after a presentation to you, and the impression that they got from that meeting - I guess you were at the other end. I know that you are the other parties that were meeting. And it is not your own minutes and it is not your own reflection, but it is about a meeting that was taking place with Air Canada people.
Because one thing that I - in the second paragraph, they want firm assurance that the government wants to fix Terminal 2. I mean, firm assurance. You just told me, Mr. Fiore, that you were discussing, you know, on a regular basis with the Air Canada officials at the time. So the firm assurance would have to come from where? Not from Paxport.
Senator Tkachuk: Chairman, is there another document to this, because it says presentation document attached.
On that paragraph that she alludes to, it says, "Air Canada management has concluded...". I know what the political assessment is because it's answered in the paragraph. In particular, they want firm assurance that the government wants to fix Terminal 2 quickly and would favour - but where is the presentation of the copy, which I would assume -
Senator Kirby: Don't have it.
Senator Tkachuk: - would be the political assessment?
Mr. Nelligan: May I explain, senator? This, I understand, comes from the Hession materials which were amongst the first documents that we received.
I think they were distributed before they were actually numbered. But they have been in the index and have been available to everyone since the outset. And I think that's the confusion on numbers. But it is unfortunate that we couldn't have asked Mr. Hession at the time, because it would appear that this is all we got. I don't think that the other document was there.
I think probably what it was is that, since we only got his personal files and not the Paxport files, that the original of that document would still be with Paxport.
Senator Hervieux-Payette: What I want to clarify, I think it is just to say what kind of confirmation would have satisfied Air Canada. I mean, did you, after the meeting or during that time, want to talk to the government officials to say: Can we discuss with Paxport? Can we develop a proposal with them?
I mean you were not certainly - I mean, if you were entertaining at a certain point, you know, an exclusive arrangement with Paxport in order to develop a concept, you were certainly talking to the government of the time to make sure that they would receive well your proposal. You would not take all that time developing a proposal with the group that finally was agreed by Air Canada to develop the facility?
Mr. Fiore: Well, I don't recall this discussion, because I didn't speak to Ray Hession at that time, and I don't know what he meant by that. But, I guess, like the senator said, I think it is probably we wanted the government to say, are you serious to let us develop this thing? Because we were - we had to plan and get it done, because we do have a problem with the transborder and international. We were just doing, at that time, finishing of the phase 1 which is the domestic wing.
Senator Hervieux-Payette: My question is: Did you get this assurance?
Mr. Durrett: We don't know.
Mr. Fiore: I don't know.
Senator Hervieux-Payette: Well, they continued to develop the proposal without you knowing if the government would favourably or not receive the proposal?
Mr. Durrett: We are not trying to evade your question. Our problem is that we have never seen this memorandum. None of our people were involved in the presentation that is referred to here, and none of us were involved in the Air Canada management meeting that followed. We simply cannot respond. We don't know.
Senator Hervieux-Payette: And, Mr. Fiore, I thought you were more or less the memory of the company.
Mr. Fiore: Well, yes.
Mr. Durrett: He is.
Mr. Fiore: I mean at the time. I'm sorry, senator. Again, I'm not trying to be evasive. It's just that we wanted to have a fix for the terminal. I guess, Hession, here - you would have to ask him, but I guess what he meant was the government supporting this approach.
Whether they came back and said yes - I know that later on, I got deeply involved in dealing. This was later. I got involved, I guess, in about May 1990, you know, after - and that's how we developed this letter we signed on June 1, 1990.
Senator Hervieux-Payette: So this was after the presentation that you were involved, from what you are saying now?
Mr. Fiore: Yes.
Senator Hervieux-Payette: There was a presentation you were not attending, and eventually you were appointed to take over -
Mr. Fiore: To negotiate the deal.
Senator Hervieux-Payette: Fine. Because in the second page of that memorandum, I guess it refers to a business plan. Probably, eventually, it would have come up to you.
Mr. Fiore: Yes.
Senator Hervieux-Payette: If we read the first two paragraphs: "Doug said that he and Messrs Desrochers...", who was your colleague at the time at Air Canada -
Mr. Fiore: Yes.
Senator Hervieux-Payette:
...and Tennant were favourably impressed with our presentation last week and especially with the improvements we weree seen to have made to the operational control provisions of our proposal.
Doug asked again that we provide him with a copy of our business plan for Pearson as soon as possible. The plan must assure Air Canada that our management operating plan will work; that our plan for financing the capital and operations of the terminal complex is sound and defensible; and, that our construction program will succeed in bringing the desired improvements in, on time and on budget.
So you were, at the time - I mean, were you involved in the discussion on the financing side or the business plan, so that - I mean, we will eventually come up with dollars and figures, so it is important to know that now.
Mr. Fiore: Yes, senator, I did subsequently see the business plan. And we did, you know, negotiate a letter of expectation with them that was to be submitted to the government - which was submitted to the government, by the way.
Senator Hervieux-Payette: Okay. And on that business plan, you were satisfied about all the, I would say, financial arrangements that were affecting, of course, your operations, since you were going to be the tenants -
Mr. Fiore: Yes.
Senator Hervieux-Payette: The dollar and cents that were charged for the lease and all the services that were given to you, you were agreeing with it?
Mr. Fiore: It was revised after we sat down and discussed it. Yes, we were satisfied with the end-product that was produced as of June 1, 1990.
Senator Hervieux-Payette: And was this business plan or this financial agreement with Paxport, in the unsolicited proposal, did you take into account the guiding principle, the lease that was in place, and how it would affect the actual conditions that you had with Transport Canada?
Mr. Fiore: I don't remember specifically calling them guiding principles, but I suspect that I do remember saying that we did have an agreement for our phase 1, that we would enter into a long-term lease. And it defined all the terms and conditions for the long-term lease once the 1997 lease expired. Okay? Once it expired in May 1997.
The letter of expectation itself was really based, as I mentioned to you before in my opening statement, really reflected the guiding principles.
We were consistent throughout. Whether it was with Transport Canada, whether it was with Paxport or whether it was with PDC, we always were consistent in our principles, the long-term lease, the whole thing.
Senator Hervieux-Payette: Maybe you could explain to this committee what was your legal interpretation of - I don't know how we call the document, but what we refer to as guiding principles, and you refer to the same wording in your opening remarks. I mean, for you, what was the legal interpretation? What was it covering? Was it just Terminal 3, and Terminal 1 was not included in that? Was it referring to a lease that terminated in 1997, but that these guiding principles were affecting the future lease and granting you some conditions that were already, I mean, defined between the two parties for the future, but that could have other elements included into it?
Mr. Fiore: Yes.
Senator Hervieux-Payette: Because, of course, the new lease would include maybe new facilities. But you were protected for a certain number of principles or clauses that would affect the - so, to what extent and for how long, for you, were the guiding principles applied after 1997? Would it have to be taken into account in the future contract?
Mr. Fiore: That's correct. It would have to take the 20 years plus two renewal options of 10 years for phase 1, which we did. And then phase 2, once we got to phase 2, it gave us another two options of 10 years.
Definitely, it was - in our opinion, it was an agreement that put in place all the terms and conditions, the business terms and conditions, to negotiate and finalize the long-term lease after expiration of our lease.
Senator Hervieux-Payette: And would you say that, when you were discussing the business plan and you agreed to the financial arrangements with Paxport on the unsolicited proposal, you were taking into account this lease and, of course, the future clauses that were derived from the guiding principles?
Mr. Fiore: Yes, because our list of expectations in that agreement that we struck with, reflected the same similar terms, the long term, the 40 years plus 60, and so on. All the ones that are in the guiding principle, except it is not called the guiding principles. And I don't really recall whether I ever told Paxport at that time, such a long time ago, whether I said we have guiding principles. But I did use that as my blueprint to negotiate the deal with Paxport.
Senator Hervieux-Payette: So Paxport was fully aware of the financial arrangements you had with the federal government?
Mr. Fiore: I don't know what you mean by financial arrangements with the -
Senator Hervieux-Payette: The conditions under which you were operating in the Transport Canada facility, and if it was -
Senator Jessiman: I mean, ask the question. Don't give him the answer.
Senator Hervieux-Payette: I'm saying, if it was, I'm not -
Senator Gigantès: Please don't coach.
Senator Hervieux-Payette: Please, can I ask my question?
Senator Gigantès: Please don't coach.
Senator Kirby: We didn't say anything when John did that repeatedly this morning. Come on.
Senator Gigantès: As he does every time.
Mr. Fiore: I'm sorry, could you repeat that question please?
Senator Hervieux-Payette: My question is this: The financial arrangement - or maybe I'm not using the proper wording, but the lease arrangement that you had with the federal government at the time, all the terms and conditions of that lease arrangement, including the guiding principles, were made available or were known to Paxport?
Mr. Fiore: No, no, I didn't say that. I said I used that to develop the agreement between us and Paxport. I don't know if they knew the guiding principles. I never gave them a copy. I never discussed that with them specifically.
I just said that I used - I was consistent in my approach with Paxport as I was with the government in the guiding principles.
Senator Hervieux-Payette: Okay. I think it is important because, there are, you know, grey areas sometimes. And when you mentioned that Paxport - you finally, I would say, concluded - I mean, you would have signed a lease with them under the conditions that you had negotiated with them.
If government had said, go ahead with the proposal of Paxport, you would have signed and made a deal with them, and they would have built the airport, and you would have had a new leasing arrangement with them.
Mr. Fiore: That's correct.
Senator Hervieux-Payette: And you were satisfied with it.
Mr. Fiore: Yes, of course. But we would have developed that lease agreement - again, this letter was spelling out all the different principles to develop that long-term lease.
As you know, senator, it takes weeks and weeks to finalize a lease, especially when you're already doing it on a ground lease. That's why usually you have - that's why we had guiding principles with the government. That's the same thing we did with Paxport. It was like, maybe, a three-page or a four-page affair. That's all it was.
Senator Hervieux-Payette: And this document you refer to was stating the conditions that you would need to be respected -
Mr. Fiore: That's correct.
Senator Hervieux-Payette: - in order to sign, finally, a lease?
Mr. Fiore: Yeah.
Senator Hervieux-Payette: Saying that it has to meet this condition, this condition, this condition.
Mr. Fiore: That's correct.
Senator Hervieux-Payette: And, of course, it has to do with the physical facility and, I guess, certain standards and certain services provided - I don't know. I mean, what kind of conditions are we talking about? Because there are many, many things in an airport.
Mr. Fiore: Basically, what we talk about, in an airport, you know, we talk mostly operational space. You are talking about gating. The gates are critical. We talked about that. We talked about lounge space, baggage room space, all of this space. Check-in space. Everything that you need from an airline point of view. Then we talked about the management and the scheduling of our flights. It is actually the way Air Canada operates Terminal 2 today.
I don't know if the senators know, but we are not changing anything. All we wanted to do was continue to operate the way Air Canada is operating in Terminal 2 today, managing the schedule, managing the gates, managing the whole airline operation. We weren't leasing space to retailers and all that stuff. That's still government, or whoever takes over the airport, whoever is the landlord.
I hope I have answered that. It covered all those types of conditions. And the term of the lease, if I remember correctly, we talked about 60 years, 40 years plus 20. Similar to what is in the - I believe you have a copy of the guiding principles in these binders. I've seen a few copies. And it is basically similar, except it was a list of expectations, that this -
Senator Hervieux-Payette: And I will skip a few steps, and say, there was more or less a figure, a dollar, I mean, an estimate that - providing they would respect all your conditions, you were not expecting to continue to pay $2 and a few cents.
Mr. Fiore: No, that's correct.
Senator Hervieux-Payette: I suppose you saw that there was also an impact on your rent.
Mr. Fiore: Definitely.
Senator Hervieux-Payette: So what was the, I would say, threshold or, more or less, the finer figure or the highest figure that you negotiated with Paxport then?
Mr. Fiore: Well, I can't remember the highest figure. But to answer this to you, is that whatever capital they spent, just like we did with the government, they would have to recover that capital over a period of 20 years or 25 years. I don't know. I can't remember what amortization period they used, and we would pay the O and M, the operating and maintenance cost of the space that we occupied, the operational space.
And of course, the government, or whoever the landlord would be, would then collect the revenues from the retail operations and other lessees.
Senator Hervieux-Payette: But do you think these documents could be provided to us, so that we can compare what was the final agreement with the new company, new approach, new RFP? Because we seem - I mean, we were informed that you were more or less the stumbling block, that you would say in English, about the Mergeco making a deal or not making a deal. You were, more or less, the company that would make or break the deal.
Mr. Fiore: We are up to 1993 now.
Senator Hervieux-Payette: I know. I know. I'm just saying that I am trying to compare the deal of 1990, compared to the deal of 1993.
Senator Tkachuk: The deal of 1990 was Terminal 2.
Mr. Fiore: That's correct.
Senator Tkachuk: It did not include Terminal 1.
Mr. Fiore: No, they were going to develop that separately, and we were just talking Terminal 2.
Senator Tkachuk: So what they were negotiating -
Mr. Fiore: Was the Phase 2.
Senator Tkachuk: - was phase 2 of Terminal 2. Terminal 1 wasn't in the picture.
Mr. Fiore: That's correct. It was in the picture for the other. We knew that Terminal 1 had to be fixed, but we were going to only pay the rent, the space that we were occupying in Terminal 2.
Senator Hervieux-Payette: Historically speaking then, when you made the agreement to upgrade Terminal 2 and to invest several millions in it, I mean, was it because, I mean, the Paxport proposal - unsolicited proposal did not materialize. And then, of course, you had to do something about it, and you did the improvements to Terminal 2?
Mr. Fiore: No, we were already under way with the improvements. That was phase 1 which is the domestic wing. I think you've travelled through it. You've seen it. That was already under way. And that was done by us in partnership with Transport Canada, and it worked very well.
Senator Hervieux-Payette: Okay. I will come back to more in line, in terms of chronology, back to more recent dates.
In March 1991, Transport Canada told you that you had to remain impartial in the request for proposal because the decision was to go through a request for proposal. And so what you said - what kind of relationship then did you have with Paxport from that moment on, when an RFP was issued?
Mr. Fiore: At that point in time, we formally advised - I think it was in April of 1991, once the decision was made by the government, we formally advised Paxport that we cancelled that agreement, that agreement became null and void, and that we would be dealing at arm's length with them and any other developer that would happen to be bidding on this Terminal 2 and Terminal 1 project.
Senator Hervieux-Payette: Because I refer to a document that I will ask my staff to distribute, document D, of March 1991. And it is a memo that was given to us by Mr. Hession, to Mr. Matthews, to the two Mr. Matthews, Don and Jack, with copies to Mr. Bill Neville, Paul LaBarge and Trevor Carnahoff.
It says:
I spoke this morning with Doug Port who informed me that, by April 1, 1991, Air Canada is obliged to submit its statement of requirements to Transport Canada for possible inclusion in the forthcoming proposal call.
Transport Canada cautioned Air Canada not to use this opportunity to act on behalf of any third party's interests...
Meaning Paxport.
To keep its skirts clean, Air Canada will be sending me a letter in the next few days severing our special relationship. A copy of this letter will be given to Transport Canada.
Informally, Doug and I have agreed to maintain our dialogue but Doug emphasized his obvious need to look after Air Canada's interests first.
This situation is not unexpected. In any case, our relationship with Air Canada is well established.
I'm just saying that it says, on one hand, and you say to us that you have severed your ties and you are supposed to treat everybody equally. And from that memorandum, I have the feeling that they still had some privileged information or privileged relationship.
Mr. Fiore: No, not at all.
Senator Hervieux-Payette: No?
Mr. Fiore: No.
Senator Gigantès: Your charm misled them?
Senator Hervieux-Payette: I am just referring to a memo written by Mr. Hession, and it's his own words.
Mr. Fiore: Maybe, you know, like -
Senator Tkachuk: Can I just clarify this? We've got copies going - Mr. Neville, he is an owner of a lobby firm here in town. Is this Paul LaBarge guy, is this the same guy who was a partner of Mr. Chrétien? Is that who that is?
Senator Hervieux-Payette: I don't know. I was not working in that firm.
The Chairman: Yes.
Senator Tkachuk: At that time - I just want to know who these people are. So Mr. Paul LaBarge, that's the same lawyer, is it not, that's the partner of Mr. Chrétien in 1991?
Senator Hervieux-Payette: I don't know him.
Senator Tkachuk: Well, I am asking. And Trevor Carnahoff, that's a Paxport guy, or is he -
Senator Kirby: A Claridge guy.
Senator Tkachuk: A Claridge guy?
Senator Kirby: Oh, sorry, I don't know.
Senator Tkachuk: Well, I'm just asking. We've got to know where all these memos are going to. That's all I wanted to know.
Senator Gigantès: Does counsel know who these gentlemen are?
Senator Tkachuk: I don't know. I'm just asking.
Mr. Nelligan: Trevor Carnahoff will be a witness here later on. He is scheduled to come with the developers later on.
Senator Gigantès: So he was a member of which particular development team?
Mr. Nelligan: I will have to look. He is a representative of the Matthews Group.
Senator Gigantès: I see. And Mr. Bill Neville was the lobbyist for Mr. Matthews, was he?
Mr. Nelligan: That's right.
The Chairman: Gentlemen, in deciding to join in the Paxport proposal, were you subject to any political pressure to support Paxport, rather than any one of its competitors?
Mr. Fiore: Not at all.
The Chairman: Then you selected Paxport solely on the basis of the merits of its position at that time?
Mr. Fiore: That's correct. You are talking about 1990 now?
The Chairman: Of course. Dates are hard to come by here.
Mr. Fiore: I just didn't want to make that assumption. Yes. That's correct. We evaluated all the three proposals. We did the same thing, in depth. ADC, which was Huang and Danczkay at the time, that built Terminal 3, had given us a proposal.
And there was another company that was formed just to - Canadian Airports Limited, I think it was.
We evaluated them all, and we selected because they best met our requirements, we felt, at that time for the phase 2 redevelopment of Terminal 2.
We're talking 1990 now.
The Chairman: It is on page 6.
And it starts with the first date; work began in late 1989, to upgrade the domestic arrival, et cetera. Then it goes down - it says, during that period, which we assume is 1989 or '90, Air Canada received unsolicited proposals from a number of developers, et cetera. And at that time, Air Canada did prefer the Paxport proposal on the basis of both cost and efficiency.
Mr. Fiore: That's correct.
The Chairman: So that answers my question.
Senator Hervieux-Payette: Maybe we are referring to Doug Port. Mr. Fiore, what was the role and what was the job of Mr. Doug Port at the time in Air Canada?
Mr. Fiore: I believe that he was senior director of airport development, and I was director of real estate. I was the one negotiating the deals. So he was the senior director of airport development.
Senator Hervieux-Payette: You were on the same level -
Mr. Fiore: Yes.
Senator Hervieux-Payette: - but in two different functions.
Mr. Fiore: That's correct.
Senator Hervieux-Payette: I continue because, although we don't have Mr. Doug Port, he was from Air Canada. I will refer to other documents from Paxport, and if you are aware, and if you know about it, I mean, you will just tell us, because we tried to clarify and these documents were given to us by Paxport.
On March 21 - it is document E - it is another memorandum from Ray Hession, to Mr. Don and Jack Matthews, with one copy to Trevor Carnahoff. And it says:
I met on Monday, March 18, with Doug Port of Air Canada.
Our relationship continues to be strong and productive.
Doug confirmed that, by the end of this month, Air Canada will be putting its requirement for Terminal 2 to Transport Canada. I urged them to keep open the option of eventually redeploying the Air Canada trans border sector to the T1 satellite in his discussion with Transport Canada. He appeared to agree.
Doug also pointed out again that, if Air Canada is not satisfied with the outcome of the forthcoming proposal call, it may choose not to cooperate with Transport Canada and the chosen developer using its existing lease at T2 as its lever.
How would you interpret the last paragraph, I mean, using the existing lease at T2 as its lever? Because it may be a little bit more in your area of responsibility, because this is real estate we are talking about now.
Mr. Fiore: Well, we - I think, and I'm not sure what he meant by this memo. We have - the current lease, which expires May 1997, has - what the old Gate 80 was there, we built - we call it the Gate 80 connector. We have - for three gates. I believe it is for the commuter gates. That was - again, Transport Canada could not finance that. So we built that and own it. And that's in the lease.
And, of course, what he's talking about, the satellite, I guess he is talking about connecting that area to Terminal 1. He would have to connect where that is to Terminal 1. I think that's what he meant by this here.
But, you see, we being the owner, Transport Canada would have to come to us on that lease. It is in the lease. It is in your documents.
Senator Hervieux-Payette: I know, but when you say -
Mr. Fiore: I didn't say that.
Senator Hervieux-Payette: I'm not an airport expert, and when you say "the option of eventually redeploying the Air Canada transborder sector to the T1 satellite", with Transport Canada, it is hard for me to visualize what it means. That's why I'm asking you. And I am asking at the second paragraph which seems to be talking about the overall leasing arrangement, that you may choose to use your lease at T2 as a lever for negotiation, for bargaining purposes on the new transaction.
Mr. Fiore: In any landlord-tenant relationship, you have a document. And, you know, if they wanted to build something there, they would have to get our permission, because we own that and our lease expires in May 1997.
So you can't come and build - it is like if I lease you an apartment, I can't come to your apartment and start building in there without getting your permission. I guess that's what this - I don't know, I guess he means here. I didn't write this, as you know, so I guess that's the best I can tell you.
Senator Hervieux-Payette: Okay. Fine. I won't make any comment, not to have other people commenting.
Then I go to a later-on memorandum from Mr. Hession. It is my document F, July 12, on the subject of Air Canada. And it says:
I met this morning with Jean-Jacques Bourgault, Vice-President, Airport Services and Julien DeSchutter, Director, Airports Development.
So I suppose they were close to you.
Bourgault has responsibility for all aspects of airports - marketing, operation, development. DeSchutter has taken over from Doug Port.
It became clear early in the meeting that we are held in high regard by Air Canada. They both made it clear that, if there is to be a private developer for T1/T2, they continue to want us. They also said that they do not now nor intend in the future to have discussion or dealings with any other developer. Apart from making the new acquaintance, reviewing past history and sharing intelligence on future prospects...
The way I interpret - and this is a document given to us by Paxport - is that you were having privileged discussions with Paxport that were not of the same level, the same degree, and the same kind of relationship with the other proponents. I am just trying to understand the meaning of that paragraph.
Mr. Fiore: I can't add anything because I don't know what this means. They had a meeting. Whether they discussed this or not, I really can't tell you. I wasn't at that meeting.
Senator Hervieux-Payette: But, "...they continue to want us." Did you make any statement? Did you make any gesture? Were you under the impression that Air Canada was, in a way, giving some signs that they were the preferred party? That's what they say.
I said, did you do anything -
Mr. Fiore: No.
Senator Hervieux-Payette: - that would lead them to conclude that?
Mr. Fiore: No. I didn't.
The Chairman: Senator, your 31 minutes is up. Do you want to tie it up, or come back again?
Senator Hervieux-Payette: I guess, yeah, I will come back again, otherwise, I won't be able to be logical.
The Chairman: Senator LeBreton?
Senator Tkachuk: I just have a question of counsel before - if a partner of a law firm, is he tied to the same restraints of confidentiality and client privilege as the lawyer himself that is acting on behalf?
Mr. Nelligan: Yes.
Senator Tkachuk: So the whole firm - if I'm dealing in your law firm, then the partnership would respect my relationship with you as a client-lawyer relationship?
Mr. Nelligan: Of course.
Senator Tkachuk: This is kind of important then. I guess we can't ask about Mr. LaBarge, but we can find that out, I suppose.
Mr. Nelligan: The difficulty is, I don't think we have any partners of Mr. LaBarge here.
Senator Tkachuk: No, exactly. But just his name kind of came up here, and it sort of got me curious, 'cause I've read the name in the newspaper and stuff. So I just wanted to make sure it was the same one. I think it is.
The Chairman: Senator LeBreton?
Senator LeBreton: Thank you, Mr. Chairman.
And thank you, representatives of Air Canada. Being one of your customers, I have a lot of time for Air Canada and the service they provide.
I'm just going to refer to your statement and, on page 6, when you talk about - the top of page 6, you say:
In exchange for absorbing the lion's share of investments in a rented facility, Air Canada and Transport Canada agreed to terms and conditions for a long-term lease at Terminal 2. The "Guiding Principles For Air Canada's Lease Negotiations" are dated July 26, 1989.
And I think one of you said they were signed in August.
Of course, you went on to say, on page 10, Mr. Robinson, that the December 1993 cancellation of the agreements, between Transport Canada and PDC also negated the lease between PDC and Air Canada.
I have a very specific question. Do you still believe the guiding principles to be binding? And do you expect the - I always call it the "yet to be properly organized" Greater Toronto Airport Authority to honour these guiding principles and be bound to a long-term lease?
Mr. Durrett: The answer to that is absolutely yes.
Senator LeBreton: Good. That's a very definitive answer.
I've got another direct question. Would you be better off today had the Pearson development - again, you alluded to it in your notes - had the Pearson development scheme of 1993 gone ahead, than you are at present, and how much better off? Like, what would the situation have been today, had it gone ahead?
Mr. Durrett: We are just now launching the $35 million interim construction program that Mr. Robinson talked about a little bit earlier. And we have launched that two years late.
The work that we are doing right now is less in volume and scope than the initial work that would already have been accomplished by this time had the PDC program proceeded on schedule. So, from a pure facility standpoint, we are not nearly as well off. We are not as well prepared for Open Skies and the international expansion. So I think that's the down side of not having proceeded with it.
Senator LeBreton: And, of course, as you pointed out in your opening statement, the Open Skies - the potential is unlimited apparently.
Mr. Fiore: Correct.
Senator LeBreton: In his testimony yesterday, John Desmarais said it would take an eight-year lead time to bring Pearson up to standard, and the window of opportunity has passed to operate Pearson with only two terminals.
He talked about Terminal 1 and what the government is doing and the cost. But he talked about, ultimately, having to shut down Terminal 1 and shifting the passengers to Terminals 2 and 3, which would then bring them up to capacity.
How do you plan to deal with this situation when this happens? What are you going to do?
Mr. Durrett: Well, what we have been doing, we have been working on that very question for the past three to four months.
Air Canada has commissioned architectural work to come up with what we feel would be a good airport solution for the terminal congestion problem, including the structural problems with Terminal 1. And currently - well, as of last week, we presented all of these studies to our key people internal to Air Canada, and we have come up with an internal policy decision that this master plan, in our opinion, not only would solve Air Canada's problems, but would solve the airport terminal area problems.
Now, the next step that we have as Air Canada, we are going to present this solution both to Transport Canada, as well as the Greater Toronto Airport Authority. This won't be a surprise. They have been sitting in our planning meetings, both of these groups, for the past several months. But we are in a position now where, frankly, we feel we have got the solution.
The eight years - did you mention eight years?
Senator LeBreton: No. He mentioned eight years as the lead time, like, to bring Pearson up to standard.
Mr. Durrett: We can't - Pearson - that is total - we just cannot live with that. Not just Air Canada. I don't think Toronto can wait that long. And the master plan that we have prepared right now, if you fast-track the construction - now, I'm not talking about dealing with all of the politics of trying to let a contract. I'm talking about let the contract, get it done. In our opinion, we can have the first phase of this master plan complete in three years, and that would then begin to solve the Terminal 1 problem also.
Senator LeBreton: On this master plan - and I don't mean to put you on the spot here, but I have heard - there has been some discussion about the construction of a new terminal, and I have heard this referred to as the "infield terminal" or the "mid-field terminal".
Mr. Durrett: You must have been sitting in some of our planning meetings.
Senator LeBreton: No, I wasn't actually. I was not, although I heard the term, "mid-field terminal" discussed - I think it was perhaps not in testimony but around this room.
Isn't it - so a mid-field terminal, isn't it awkward and expensive to build this additional terminal - like, I guess I will have to call it Terminal 4 for the purposes of this discussion - away from the cluster of the main terminals?
Mr. Durrett: The PDC ultimate plan, that also solved the Terminal 1 problem as a part of their master plan, was costed in the area - a capital cost of $520 million to accomplish that. And the master plan that you're referring to, that involves gates in the infield area connected from Terminal 2 by an automated guideway transit system -
Senator LeBreton: Under ground?
Mr. Durrett: Right. The estimates that our professionals have put together indicates that it is very close to being the same. And yet we feel, frankly, that this is a far superior master plan than the PDC plan which, by the way, they didn't have - they, PDC, didn't have the flexibility of looking at the infield. There was just a very specific area that they could develop from. And our study took the entire airport, and we all tried to come up with the best solution without any of those kinds of constraints.
Senator Gigantès: What do you mean by infield or mid-field? Is this in the middle of the airport with the runways around it?
Mr. Durrett: This drawing does not quite show it, does it?
Somebody gave me this as a document that you all have?
All right. The infield area, it's not on this map, but it's located right over here. It is outboard of one of the runways that are located - do you know what runway it is?
Mr. Robinson: Fifteen-thirty-three left.
Mr. Durrett: I think it is, 15/33, but it is outside of that and right between the brand new runway that's under construction now. The two 15/33s, the infield is that area between those two runway facilities.
Senator Jessiman: In relation to what terminals now?
Mr. Durrett: Terminal 2 is here. Terminal 1 is here. Terminal 3 is right here. The infield is about right here.
The Chairman: What's the nearest terminal?
Mr. Durrett: Between 2 and 1.
The Chairman: How far away?
Mr. Durrett: A thousand feet? It was a kilometer -
Senator Gigantès: Isn't a kilometer 3,200 feet?
Mr. Durrett: It was closer to a kilometer.
Senator LeBreton: But the fact of the matter is, this would have to be connected with an underground terminal with a moving sidewalk.
Who will pay for Terminal 4? Who was expected to pay for it, the mid-field or -
Mr. Durrett: Terminal 4 or the mid-field area. Eventually, the tenants will end up paying for it. The question is how will it be financed? And that's a question that is on the table right now. In the past and historically, Transport Canada has financed a number of those improvements. In recent years, they haven't been able to do that to the same degree, and that's why Air Canada had to come forward really with this interim plan.
The $35 million is Air Canada money, and that's because our need is so great that we have stepped forward to finance airport facilities which, normally, airports do not do.
So the answer to your question: That's one of the things that we are looking for. We are between two landlords, Transport Canada on the one hand, the Greater Toronto Airport Authority on the other.
We would like for Transport Canada, since they are the people that we still have our lease with, we would like for them to work with us on establishing a long-term lease, similar to the lease that we negotiated with PDC, that would later be assignable to the airport authority. But with that long-term lease, there are various financing vehicles that would become available; that we, jointly, would work with the airport authority, Transport Canada, and Air Canada to come up with the best financing vehicle. But it could be done, especially with a long-term lease in place.
Senator LeBreton: And then if this were done, Terminal 1 could be torn down and this blight could be removed from all of us.
Mr. Durrett: Exactly. That's why this master plan also works towards an overall Toronto - it's not just an Air Canada solution. We think it's a good technical solution for Toronto itself.
Senator LeBreton: So there's a lot of work to be done. Hopefully, you'll get a lot of cooperation.
Mr. Durrett: Yes.
Senator LeBreton: You may have answered this, because you were talking about some figures - what is the cost difference or what would the cost difference per gate be between this new proposed terminal, Terminal 4, mid-field terminal, as opposed to what the cost per gate would have been under the terms of the PDC plan?
Mr. Durrett: We may have to run a couple of numbers here, roughly. PDC ended up with a total of - 48 gates?
Mr. Robinson: Maximum 46 gates, I believe it is. All together, but that's including all the current gates in Terminal 2.
Mr. Durrett: The master plan that we are presenting right now has flexibility. You can build more gates in the infield area than the initial phase might call for. And initially we were looking at around 58 gates. Now, these are really going to be rough, rough assumptions.
But the difference, if we are saying the capital cost was roughly the same between PDC and the first phase of the master plan that we've been working on, 46 gates would relate to $520 million, and 58 gates would relate to - what was it - $525 million.
Senator LeBreton: So the difference per gate then would be -
Mr. Durrett: Substantially less with the revised master plan. And we will run those numbers, but it is really not a good measure of total cost, because we are dealing with existing gates as well as new gates.
Senator LeBreton: As opposed to a new building, a new terminal.
Obviously, you know, I have just kind of looked into - I'm sorry to have, kind of, cut into your plans, but obviously you are trying to follow the model that you mention in your statement about planning for the future, which is surely what any good airport management plan should entail.
Mr. Durrett: I need to say, Transport Canada has been very cooperative. The new airport authority has been very cooperative. But the problem is, neither one of them is willing to go forward. And that is a very big dilemma.
Senator LeBreton: Yeah. I can understand that, having sat through this exercise for the last two months.
I just wanted to ask, going back to the whole request for proposal process, dealing - you did respond to the pre-request-for-proposal discussions with your ideas for redevelopment, as we have heard in testimony, also in your statement. You also, as was shown to us yesterday, wrote to the deputy minister emphasizing the fact that you believed you had a commitment to a long-term lease, and that was on the record yesterday.
Did you examine the request for proposal documents? This is back, of course, for PDC. And if you did, were you not surprised that there was no mention of your guiding principles in the request for proposal or, indeed, in the documents room?
Like, was this not - how did this - we've still - we've never been able to figure out how this happened.
Mr. Fiore: Well, if you go to, let's see, Binder 4, back in October or December - December 6, 1991, we provided Transport Canada, Air Canada's position on the whole, for the RFP. This is the input for the RFP which included the master plan of Terminal 2. And we also provided them principles for leases, rental rate agreement, protection of Air Canada's equity in Terminal 2, scope of development, principles, control over airline operational areas. It is all spelled out, for Transport Canada, the controls for them and for Air Canada and for the developer.
Now, we provided all of this. I believe - and I'm not sure, I don't want to - I believe the only thing that was quoted in the RFP was the equity issue of Air Canada. I think, something like Air Canada must receive full compensation for the value of the connector wing.
Senator LeBreton: And they mentioned the 1997 date, if my memory serves me correctly.
Mr. Fiore: But these principles here that we - are based on the guiding principles.
Senator LeBreton: So, because, you know, in Mr. Broadbent's testimony, this fact that these documents were not mentioned specifically, and they weren't in the documents room, it seems to have been a mystery. I was just trying to get from your perspective what you thought.
Mr. Fiore: I really can't - I guess Transport Canada must have made a decision. We gave the information what we thought we wanted protected for the RFP.
Mr. Durrett: Also - I think I am right about this - of course, we were not involved with the preparation of the RFP. And so we would not have picked that up. I'm sure we would have said something about that had we seen that.
Mr. Fiore: Also, we were not even involved in the evaluation. We were not involved at all. We did it at arm's length. We treated everybody equally.
Senator LeBreton: Yes, I read the testimony in the House of Commons. That came out very clear in that as well.
That's all I had, Mr. Chairman.
The Chairman: Gentlemen, let's be clear on where we are here. You know what this parliamentary committee is all about. We are not really so much interested in the past as we are in the future, and only in the past as an examination of public policy into the privatization of airports and particularly Pearson development airport. We have no grief for Mr. Matthews or Mr. Bronfman. We really don't. We're just trying to find out what it was that caused the government to cancel this particular deal.
Now, you mentioned three - and we're not trying to turn the clock back.
So we have a Toronto general - whatever they call it, the Greater Toronto Airport Authority now, in the process of being formed. I guess it is now incorporated. It hasn't got a chief executive officer yet. The airport hasn't been turned over to it, even though they have managed to borrow some money.
But you mentioned three or four years to get something off the ground, if I understood your answers to Senator LeBreton.
Glen Shortliffe told us that, you know, at best, it's 2003, 2004. That's the figures we're getting. What do you expect to get in three or four years if you're -
Mr. Durrett: Let me go back and say that, when we did the master plan studies, we put together a procurement, a design schedule and a construction schedule, without constraints, as I mentioned earlier. I was talking about a fast-track design and construction job which means you probably negotiate construction contracts; you let them as design is coming - is being done, literally; and you compress the entire schedule itself, in order to produce the construction in the shortest period of time.
I have been involved with terminal design and construction for almost 30 years, and I am convinced that, for instance, if Air Canada had the authority to let these contracts and administer the construction, we could deliver that facility complete - not started, completed - in three years.
The Chairman: You would be a landlord.
Mr. Durrett: No, sir. We would just serve as the expediter to do the construction. We would not own it. We would still lease it. And there's plenty of precedents for this.
When I was with Delta Airlines in Atlanta, when we built the new mid-field terminal in Atlanta in the early '80s, we, Delta Airlines, on behalf of the city of Atlanta, constructed the international arrivals terminal building. And we acted on behalf of the city to do that. And the reason was exactly the situation we face now. It was the most expeditious way to have the international terminal facility ready at the same time the rest of the city of Atlanta's terminal facility was ready to open.
We've had experience even with the Port Authority of New York and New Jersey where we, an airline, on behalf of the Port Authority, actually did the design and the administration of construction.
The Chairman: Well, you have no faith in the ability of this Toronto authority -
Mr. Durrett: Yes, sir, I -
The Chairman: - to do that within the time period that you think is crucial?
Mr. Durrett: Our problem is that I am not sure - or there are no guarantees that the airport authority will have concluded negotiations with Transport Canada to transfer the airport before we could deliver the facilities.
The Chairman: Supplementary from Senator Gigantès.
Senator Gigantès: You are saying that what the Toronto airport needs to have, you could deliver in about three years?
Mr. Durrett: Yes, sir.
Senator Gigantès: Everything?
Mr. Durrett: When I say everything, I am not talking about a full up final development of Pearson, forever and ever, amen. I am talking -
Senator Gigantès: There is no such thing.
Mr. Durrett: That is true, too. I am talking about an initial development that would expand and modernize Terminal 2, would provide additional gates at the infield for expansion that could also include Terminal 1. It would not negate the possibility of Terminal 3 being expanded to perhaps take care of Terminal 1.
The Chairman: Replace Terminal 1?
Mr. Durrett: The master plan that I had just talked about earlier has the flexibility to take care of the tenants in Terminal 1, if that is the answer that Transport Canada and the airport authority feels is the best solution for the airport.
Senator Gigantès: How does this compare with the Pearson Development Corporation proposal?
Mr. Durrett: The PDC proposal confined itself geographically strictly to Terminal 1 and Terminal 2. The plan I am talking about expands beyond that and goes between those 15/33 runways that we were talking about a little bit earlier. It broadens the opportunities, and because you are able to construct at the infield area, you are not building around an existing, ongoing operation. That is another way to compress the amount of time it takes to provide the facilities.
Senator Gigantès: Square foot per square foot of facilities, how would your plan compare to the point of view of the public with the Pearson Development Corporation?
Mr. Robinson: I think our process or would be somewhat larger than the PDC.
Mr. Durrett: The total gross square footage for the Air Canada - the scheme I have been talking to you about would be more than the square footage of the PDC master plan.
Senator Gigantès: Dollars per square foot?
Mr. Durrett: I would have to have all of our estimates that we had done earlier. I do not have those with me.
Senator Gigantès: Because this sounds like an alternative to the Pearson Development Corporation.
Mr. Durrett: It is, yes, sir.
Senator Gigantès: I wonder why this alternative was not looked at. Did not you make such a proposal? Didn't you talk to anyone about it?
Senator Jessiman: How do you finance it?
Senator Gigantès: Excuse me, that is their problem.
Mr. Robinson: When PDC did their plan, they did not have the capability of touching the infield. The infield was not part of the PDC proposal that they worked out with Transport Canada. That was exclusive T1 and T2 within the confines of that area. We now have - with the cooperation of Transport Canada, we now have the opportunity to develop an infield terminal. PDC did not have that ability.
And because we have that ability we can fast track it because we are developing on virgin land like Terminal 3. When Terminal 3 was constructed, that is exactly right, we were not working around T1 and T2. Otherwise Mr. Shortliffe is correct. If you are going to work around all those existing facilities, T1 and T2, the other constraints, then yes, it is possible that seven or eight years down the road is a reality, and we cannot wait for that time frame. That is the key then, senator, the infield is part of it today - that was not part of the PDC plan.
Senator Gigantès: Why is it part of it today and not -
Mr. Robinson: You would have to ask Transport Canada that question. It was not part of the infield.
Senator LeBreton: I just want to clarify. The point of my question was to say, if the plans had gone ahead as you stated in your statement, 1993 would have been the ideal time with the slow downs to have done this work. All this to say, this is a lot of time lost. Now Air Canada has a critical problem and now, of course, naturally they are now seeking other solutions. The point of my question was, what are we going to do now that all of this other collapsed? That was the only point of my question.
Mr. Robinson: We have to spend this additional $35 million today. Our backs are against the wall. It is not nice to have to put our passengers for the next two years through construction working around an operation, but we have no choice. That is the position we find ourselves in.
Senator LeBreton: You wouldn't be in this position if this had gone through?
Mr. Robinson: The work we are doing now would have been pretty well all completed.
The Chairman: I suspect you are in the wrong forum.
Senator Lynch-Staunton: I would like to ask questions on the Nixon report, although after what we heard this morning, it has been so discredited it will be embarrassing to refer to it from now on. However, it is still before us as an official document and that is the reason we are here, and I suppose we have to keep an open mind until Mr. Nixon makes his own presentation.
Senator Gigantès: I would love to watch you keep an open mind.
Senator Lynch-Staunton: Did any of you appear before Nixon?
Mr. Fiore: I was invited to meet with him and I met with him for an hour.
Senator Lynch-Staunton: Was that the extent of Air Canada's participation in his investigation?
Mr. Fiore: That is correct.
Senator Lynch-Staunton: Can you entertain us on exactly what his concerns were and what concerns you shared with him?
Mr. Fiore: Well, the concerns I shared with him are just exactly what we have been talking about. We needed - there were two projects involved, one was the terminal redevelopment and the other was the air-side redevelopment, that is the north/south runway was in dire need for the airlines. I tried to impress upon him somehow we have to find a solution to get these projects going, we cannot wait. I tried to impress upon him that we, Air Canada, we are the meat between the two slices of bread. We had to get this thing, because we were the ones being in a non-competitive position when you compare Terminal 3 and Terminal 2 because our passengers at that time were going to be subjected, which they are today in transborder is the problem and international.
So, I expressed that and I gave them some ideas but he asked me questions. I cannot remember exactly the questions, but basically, you know it was just mostly questions that he asked me.
Senator Lynch-Staunton: But you say you only spent one hour. Air Canada, the major tenant, major user, major contributor to the airport in Toronto was only allowed one hour to make a presentation in front of a committee, in front of an examiner, investigator who was called on to make a recommendation to the Government of Canada? I mean, I am just asking you to confirm. I am not asking you to comment. It was his call to give you an hour or give you a week. I am just asking, no one else from Air Canada except you went?
Mr. Fiore: To the best of my knowledge, no. I am the only one that went.
Senator Lynch-Staunton: Did anyone accompany you and who was there on his side? Did he have experts?
Mr. Fiore: He had his advisor.
Senator LeBreton: Brad Wilson?
Mr. Fiore: That is it, Brad.
Senator Lynch-Staunton: Did you impress on him the impact on Air Canada of the cancellation of the Pearson airport agreements?
Mr. Fiore: Yes, I did.
Senator Lynch-Staunton: You shared your concern with him?
Mr. Fiore: I did.
Senator Lynch-Staunton: Can you tell us what his reaction was, if he had any?
Mr. Fiore: He just listened and his assistant was making notes.
Senator Lynch-Staunton: Casual, informal?
Mr. Fiore: It was very casual and informal. He sat on the couch and I sat on the other opposite and it was sort of informal, I would say.
Senator Lynch-Staunton: I do not want to read too much into what you are saying, but I find it extraordinary that after -
Senator Gigantès: Supplementary, Mr. Chairman.
Senator Lynch-Staunton: Let me finish my main presentation. Just calm yourself, Senator Gigantès. After hearing of the importance of Air Canada to Pearson, that 40 per cent of Air Canada's flights begin, terminate and connect at Pearson, 220 flights a day. You account for 10 million passengers a year. Now half the passengers in and out of Pearson are accounted for by Air Canada, is that right?
Mr. Fiore: That is right.
Senator Lynch-Staunton: That's all is about 20 million. Air Canada accounts for half of those passengers?
Mr. Fiore: Yes.
Senator Lynch-Staunton: And Mr. Nixon was asked to make a report on a controversial agreement, and allowed the carrier, which was responsible for half the passenger traffic, one hour in a casual conversation in his office?
The only other regularly scheduled airline which was invited to appear before him according to the list is Delta Airlines. Canadian Airlines is not here, KLM and the international airlines are not here. We will have to ask him an explanation for the reason it was so casual regarding Air Canada.
Did you make any written submissions to him following that?
Mr. Fiore: No, it was all just verbal. I had some handwritten notes in my files.
Senator Lynch-Staunton: He did not ask you for any figures or any -
Mr. Fiore: I really don't recall.
Senator Lynch-Staunton: It was so casual and informal it was like a -
Mr. Fiore: I think he was trying to find out, you know, what I did and what the agreement was, I suspect. You would have to ask him.
Senator Lynch-Staunton: We will. We will. But we need a background to ask him more intelligently.
Senator Gigantès: May I ask a supplementary on this issue now? Have you ever had productive negotiations with anybody or constructive negotiations or discussions with anybody that were casual and informal or are they always adversarial and terribly tense and very nervous?
Can one do business in an informal manner, a casual manner in other words?
Mr. Fiore: I guess it depends on what you are negotiating. I do not know.
Senator Gigantès: Because there he is. He is smiling. Your president is smiling. He is being casual and informal and yet he is being very serious about it. Must one always have the attitude of Senator Lynch-Staunton that looks on the verge of a heart attack when he was discussing an issue?
Senator Lynch-Staunton: Neither the chairman or the vice-chairman is here so I will ask. We are talking here about a major commitment from the Government of Canada with private developers to spend up $700 million, create thousands of jobs and deliver some very important improvements to a major airport in North America. And to be told that the person called on to advise a government of whether that project should go through or not invited and spent only one hour with a major contributor to traffic at the airport and to be told, you know, that there was a very casual, informal conversation, I find that appalling. I find that disdainful of the whole process and confirms what we heard this morning and have been told before that the whole Nixon report is a sham and will rank with the Liberal Red Book as being two of the greatest frauds of this decade.
Senator Gigantès: If you could talk without being indignant, maybe you would be able to achieve things in one hour. Whereas you are always in a posture of indignation about everything, and naturally it is not conducive to getting any agreement on anything.
The Chairman: All right, gentlemen. Just a second. Please address your questions to the witnesses, would you please?
Senator Jessiman: I have not even started. I have not even had to speak. I have my hand up.
The Chairman: I was not sure.
Senator Jessiman: I thought you were the chairman.
The Chairman: I thought I was too.
Senator Jessiman: Thank you, sir. I have just a very few questions. We have heard a lot of evidence about these guiding principles. It is not just as clear as I am sure you would like to say it is, and you have said that you got a binding contract. We had evidence before us that indicates to me there might be some grey area here. But I sit back and say so what? Let's assume you don't have it. Let's assume that for the moment.
Doesn't Transport Canada and this facility need you just as much as you need them? Even if you did not have this document over their head, where are they going to go? Is United going to move in here? Does Canadian want to move from Terminal 3? It doesn't make sense.
Because you are so dominant, I do not think - they made a great deal of this in the negotiations. I sat back and thought about it and I ask you, assume you didn't have it, what are they going to do? You have to be reasonable and they have to be reasonable and that is where you have to end up, isn't that right?
Mr. Durrett: In a perfect world, that is correct. But in the day-to-day operation and function of an airport, whether it is a major airline or not, good business practice dictates that, especially in a major hub, there is certain rights and privileges that are not only imported but they are almost vital, and that is how you utilize gates, what your rights are to those gates.
Senator Jessiman: I understand. I happen to be a lawyer. I have read the documents, and certainly if I were acting on your behalf I would certainly argue that you have a deal. On the other hand, if I were working on the other side for the landlord, be it the LAA or Transport Canada, I would give you some facts that would say, hey wait a minute. That is the only thing. That is something I wanted to put on the record and have you reply to.
You said you have a new plan and it is going to cost approximately a little more than $700 million plus, is that what we are talking about?
Mr. Durrett: We are talking about just from a pure construction and design standpoint in the neighbourhood of $530 million. To that you would have to add all the financing charges, various other permits and other costs that, by the time the facility was delivered, it would be in the same range of the $700 million program that has been referred to earlier.
Senator Jessiman: If we have an LAA, and if they ever do get together and it seems that is the way the government wants to go - I made it known yesterday that I think the way to go is to give it to the private sector, let them put up their money, take their chances and run the thing. If you have an LAA, they are not putting up any equity. What they are going to do, if you give them a lease and they can get leases from everyone else, they have something that they can take to the bank, but they have not got something they can take to the bank probably that will get them $700 million, but if they did have a passenger facility charge, which is the case in Vancouver, they probably could even get more money.
My question to you - and I don't know the answer and it really does not matter, it matters to me as a passenger that travels a lot Toronto and through - what is your feeling if the passenger facility charge was brought in? One, would you oppose it? And two, even if it would not be your choice, what would be a reasonable charge for such a charge? We were told $25 to $35 per person by Mr. Hession. What would the charge be to get this kind of money?
Mr. Durrett: First of all, from our standpoint, we would prefer that a PFC not be the vehicle that finances a major airport improvement program in its own right. There may be a time and place for a PFC. In our opinion, it ought to be closely defined as to what that PFC is providing, and certainly ought to have a very specified limit of time that it is in place.
Since you were asking as a traveller, can I respond as perhaps an airline person? A $25 PFC charge is not going to keep Toronto or any other Canadian airport competitive in the world today.
Senator Jessiman: Also there is some difficulty with Terminal 3 because they could not charge the same - they wouldn't be able to charge the same fee over there, so I might change from Air Canada to Canadian, so that would be an unhappy situation for you people.
So that probably the answer to the local airport authority is to do what Transport Canada did a number of years ago and ask the private sector to come in and bid on this thing all over again, or so you can fast track it, pick out the best developer they can find to do it and make a deal with them. Somebody has to find the money and get going.
Mr. Durrett: I absolutely second that. How do I answer that question, sir, other than yes, yes, yes.
Senator Jessiman: Thank you. I just have one other question and it is, sir, about your attendance to see Mr. Nixon. Do you remember, was it the first part of November or near the end of November? He was there the whole month of November of 1993.
Mr. Fiore: I think it was around mid-November. I think it was around the 10th or 15th. I am not sure now. I could really find out exactly. I probably still have it in my 1993 agenda.
Senator Jessiman: It may be important, so if you could just let the clerk know.
Mr. Fiore: I will be glad to find out.
Senator Jessiman: If you have any notes of what he asked and you what he said, those would be helpful.
Mr. Fiore: I think I had some handwritten notes of the things that I presented to him, the things that I discussed with him.
Senator Jessiman: Certainly you didn't advise him to cancel the agreement?
Mr. Fiore: No.
Senator Jessiman: Tell him that the government itself, which didn't have any money and it still does not have any money, and this is the recommendation, for the government to proceed with the construction. Thanks very much.
Senator Tkachuk: Can I clarify that Mr. Fiore? Did Mr. Nixon invite you specifically and or did he invite Air Canada and you were sent as a representative of Air Canada?
Mr. Fiore: I think I was invited specifically. I think somebody else referred to him. I cannot remember. Somebody referred that I was the one that negotiated between PDC and maybe they should talk to me. I think that is how it happened. That is how I was called.
Senator Tkachuk: Was there a request made by Mr. Nixon to see the chairman of the board or the CEO of Air Canada?
Mr. Fiore: I don't know.
Mr. Durrett: No, but the senior management of Air Canada was well aware that Mr. Fiore was going to be talking. This was something he brought to senior management. Senior management agreed.
Senator Tkachuk: I am not reducing his role. I am just asking the question. Mr. Fiore would be an able representative I am sure. I wanted to ask the question.
The Chairman: Senator Lynch-Staunton?
Senator Lynch-Staunton: Your direct comments on the PFC's, which he told us he is against - but how is it working in Vancouver? I know initially the passengers were quite annoyed, but we were told by the manager of the Vancouver airport that now that they see the improvements going on in Vancouver, they see their money at work in other words and are willing to accept and are not objecting as much as they did for the $5, $10 or $15 they have to pay. Does it really affect passenger traffic?
Mr. Durrett: I have gone through the Vancouver airport on several occasions, and Mr. Emerson is certainly in a lot better position to comment on how the public is reacting than I am, but a family of four taking a trip, that is a pretty big hit.
Senator Lynch-Staunton: I agree with that. But would that family of four go to Seattle to escape that? Do you have any supporting evidence to show that a PFC diverts traffic to where there is no PFC, not too much disruption in one's travel schedules?
Mr. Durrett: No, I do not think we have specific surveys or numbers that would prove or disprove that. I think again the answer wouldn't be whether or not you necessarily diverted travel, but maybe whether or not a passenger decided to stay home or go. That would be a lot of speculation to try to make that decision.
But the cost of air travel, we are trying to keep it competitive, obviously, and additional charges of this nature do not help in that process.
Senator Lynch-Staunton: I accept that. Thank you.
Senator Tkachuk: Under Open Skies then, I may be able in the future from Saskatchewan take a plane, if I was going to New York, travel through Minneapolis rather than through Toronto?
Mr. Durrett: Entirely possible.
Senator Tkachuk: So I wouldn't have to go through Toronto so the fee might be a deterrent?
If I was getting a - if my family was going to New York and I was getting charged $10 or $20 or $25 per person, why would I go through Toronto if there was a carrier travelling that direction going through Minneapolis?
Mr. Durrett: It is a speculative thing that we can all, as travellers, kind of weigh between ourselves.
Senator Tkachuk: If cost means nothing then -
Mr. Durrett: Based on everything that has been said here about construction cost and so forth, cost does mean a lot in all aspects of airport activities.
Senator Tkachuk: I just want to ask you a couple questions on the - after the cancellation of the PDC contract by the Government of Canada, is that when you got your new sort of plan, getting organized for the Toronto Pearson Airport? Is that when it started to happen or you already had it in the wings?
Mr. Durrett: No, we did not have it in the wings. This plan that we have been discussing here this afternoon has been put together in the last three to four months. The interim plan that we are talking about, we started working on that nine months ago, but we, Air Canada, did not launch into an Air Canada sponsored master plan of Toronto immediately upon cancellation of the contract.
Senator Tkachuk: What is holding all this up?
Mr. Durrett: Again, what is holding everything up primarily is the fact that we have an airport authority in the wings that is ready to take over the airport, but before they can do that, they have to conduct the negotiations with Transport Canada that will actually transfer the asset, and until that gets itself done, I think we are just in a period where it is difficult to make something happen.
Senator Tkachuk: I heard - you know we had some of the representatives from Toronto Airport Authority testify here. So you are basically saying that until they get their act in order and come to an agreement with Transport Canada, you can't do anything?
Mr. Durrett: There is a reluctance on the part of both would-be landlords to proceed with a major program while these discussions and negotiations are under way.
Senator Tkachuk: Now, in 1993 of course, from the testimony we heard, if they are not ready today, they obviously weren't ready in 1993?
Mr. Robinson: That is correct.
Senator Tkachuk: They weren't ready in 1994. They are still not ready in 1995, is that correct? Toronto Airport Authority?
Mr. Durrett: It hasn't taken place yet.
Senator Tkachuk: Hasn't taken place. Do you expect they may be ready in 1996?
Mr. Durrett: That would be pure speculation. I will say to you frankly I don't want to wait. As I said just a little bit earlier, Air Canada would like the legal, present landlord to proceed and negotiate a long term lease with Air Canada that would help provide the financing vehicle and to get this construction program started. And our preference would be to let us, Air Canada, design and let contracts on behalf of Transport Canada in order to fast track this program to make up for lost time.
Senator Tkachuk: There is no - outside of the airport authority, let's say you took the airport authority away from this, they weren't in the picture. You could develop the airport if Transport Canada gave the go ahead?
Mr. Robinson: Absolutely.
Senator Tkachuk: Could you have done it last year?
Mr. Durrett: Yes.
Senator Tkachuk: So we could have had - despite the cancellation, we could have had this stuff going on? We could have had the airport development?
Mr. Robinson: Yes, sir.
Senator Tkachuk: What happens if the Toronto Airport Authority doesn't get their act together in 1996, because they tell us - when they were here they told us, oh, sometime between January and June of 1996. What happens if they don't get it in 1996?
Mr. Durrett: Senator, I think what I have been trying to say here today is we need to start the program now. I don't want to speculate and say, well if they get it done by mid-1996, you know, the airport is going to make it and we will be able to proceed with a program in due course.
Senator Tkachuk: I am asking you a question, because they came here and told us that they didn't think they could get it ready, at the earliest January of 1996 or June of 1996. What kind of position - which means nothing can happen until then.
Mr. Robinson: It only erodes our current position even further. It pushes us to four or five years.
Senator Tkachuk: It hurts Canada's largest domestic carrier?
Mr. Durrett: I am not trying to be overly persistent, but things can proceed in due course with the airport authority. As far as Air Canada is concerned, the landlord - we are willing to work with either landlord.
The point is, we don't want to wait another three years before the landlord is defined.
Senator Tkachuk: So what you are telling me is you could actually proceed and then transfer the assets to the Toronto Airport Authority?
Mr. Durrett: That is exactly what I said just a little bit earlier. But we can't proceed and finance a program without a long term lease.
Senator Tkachuk: Just like Terminal 1 and 2 could have been part of the Toronto Airport Authority? That is right too?
Mr. Durrett: Yes.
Senator Tkachuk: So there is no excuse really - I should not use that word. But I am going to go back to this. If the government continues to use the excuse that before development can continue the Toronto Airport Authority deal has to be structured with Transport Canada, from what you tell me, that is not very good for you or Toronto or Pearson or the country?
Mr. Robinson: Absolutely.
Mr. Durrett: I could not have said it better.
Senator Tkachuk: If we go to 1996 and at the end of 1996 they are still using that excuse, which is very possible because this has been going on since 1992, this is now I think 1995, what are you going to do then?
Mr. Durrett: Well, Chicago has moved ahead with major renovations and a new international terminal. Cincinnati has gone through millions of expansion to make that hub more productive. Other hubs in North America are moving forward.
The answer is that I think Toronto by default will have lost its opportunity to be a major North American hub headed toward the Pacific and across the Atlantic and transborder. That is not just an Air Canada loss. That is a Canadian loss and that is a Toronto loss.
Senator Tkachuk: Thank you, chairman. I am done.
The Chairman: Your only hope then is - I said before, you have the wrong forum. That is not our mandate. I agree with most of all of what you have said, but your only hope really is to try to make a deal with the general airport authority in Toronto.
Mr. Durrett: No, sir, I do not think we can wait to do that. Our landlord right now is Transport Canada. That is who our lease is with. That is who owns and controls and operates the airport. As difficult as it is - the airport authority, I do not blame them. They would like to be party to any long term agreement that is negotiated with the major tenant. I understand that. But the bottom line is that that is a luxury that the airport, in our opinion, cannot wait for.
We think or what I should like to propose is that our current landlord, Transport Canada, enter into a long term lease agreement with Air Canada that is a assignable to the airport authority if and when the time comes and that comes about.
But in the meantime, with that long term lease, a financing package can be put in place, design and construction started, and the airport begin to catch up with the years that have been lost.
The Chairman: Have you ever met the man who is purported to be the number one on the list to head the Toronto LAA, the man from San Francisco?
Mr. Durrett: Yes, sir, I have met him, as have my colleagues here.
The Chairman: Did you find any sympathy with him with regard to your proposal, with regard to the Department of Transport Canada and the airport authority?
Mr. Durrett: I have absolutely no idea, senator. I have not talked to him directly. I have no idea what his reaction might be.
The Chairman: All right. Well, I guess I was just saying that I thought it was - I know you feel better and we feel worse, but you are getting it off your chest, you are talking to the wrong people.
Mr. Durrett: But you are right, sometimes you just need to say something to feel better. I appreciate the opportunity to feel a little bit better, and we are going to try very much to get this in the proper forum because we think it is very important, not just for Air Canada, but for all of the other parties that we have discussed here.
The Chairman: All right. Now then, we will hear from those who now wish to raise their hands. Senator Hervieux-Payette is first. Anyone else? The last question then will be Senator Lynch-Staunton. Okay. That is it then, please.
Senator Hervieux-Payette: Just a small comment about the emergency of making a decision. I read or I heard from you and I read before that you know the Open Sky agreement was not anticipated that early, and the government came up with some Open Sky policy even at the speed that you were not expecting so we wish that they make also a very speedy decision on the future.
But since our mandate is to look more at the past - I hate to bother you with the past, but this is the purpose of our meeting is to see how we arrive at the situation we are in.
I should like to go back to one letter from Mr. Jeanniot, and I guess there are many people - and I will ask you who is and who is not - is Doug Port still with Air Canada?
Mr. Durrett: Yes, he is.
Senator Hervieux-Payette: And Mr. Jeanniot?
Mr. Durrett: No, he is not.
Senator Hervieux-Payette: Not anymore connected. Mr. Desrochers?
Mr. Durrett: No, he is not.
Senator Hervieux-Payette: We see these names from Air Canada, Mr. Chairman, and it is important for us to know where they are, and that is why they are not here I guess today.
The letter is referred to in my note as item number H and it is 00484, I think. It will be distributed to you. It is July 3rd, but there is a written note underneath, June 29.
Senator Jessiman: What year, please?
Senator Hervieux-Payette: 1990.
This was during - the letter is addressed to the honourable Doug Lewis, the then Minister of Transport, and it says:
Further to our meeting on June 4th during which I recommended the Paxport Proposal for the redevelopment of Terminals I and II -
So I guess, Mr. Fiore, this is the agreed proposal between you and the unsolicited proposal from Paxport?
Mr. Fiore: That is correct.
Senator Hervieux-Payette: It continues:
- I wish to highlight three critical issues from Air Canada's perspective.
First, and most importantly, I have great concern that Air Canada could be held to ransom should the redevelopment of Terminal II be offered for competitive bid and we would end up paying the price of the highest bidder. Such a situation would place Air Canada in an untolerable position and would also be eminently unfair inasmuch as we have no option outside of Terminal II. We are linked to the building and have been the major tenant since opening. This was not the case facing any carrier contemplating a move to Terminal III. The choice was always theirs to remain at Terminal I, or Terminal II. Carriers chose to move to Terminal III of their own free will.
There is no doubt that Transport Canada must and will receive a fair and reasonable settlement for Terminal II. That is not at issue. What is at stake, however, is the long term viability of the newly privatized company, seeking to operate on a level playing field at its major operational hub.
As we face increasing global challenges, our domestic cost base will have considerable impact on our ability to compete internationally, particularly if our competition has more advantageous conditions. It would be unconscionable for Air Canada to be the victim of an auction process which would seriously weaken its financial viability, would result in unnecessary costs being passed to the travelling public, and would be viewed with dismay by the thousands of Canadians who have bought Air Canada stock in the expectation that the company would be allowed to compete freely and fairly.
The letter is signed by Mr. Jeanniot, who was at the time the president and chief executive officer.
So, to understand clearly this question, you wanted to sign with Paxport, but Air Canada was still concerned. Because I had the impression from your work, Mr. Fiore, that you were satisfied with the proposal of Paxport and now you raise your concern. Was it for the same -
Mr. Fiore: You are talking about the June 1st letter I mentioned to you?
Senator Hervieux-Payette: The July 3rd letter I am referring to, and it refers to a June meeting of Mr. Jeanniot with Mr. Lewis. I suppose that you were, you know, working with Mr. Jeanniot at the time?
Mr. Fiore: Yes.
Senator Hervieux-Payette: And that you had recommended, I think you said in June -
Mr. Fiore: June 1st, 1990 we signed an agreement, and I guess that is what was presented to the minister.
Senator Hervieux-Payette: You say that you have some reservation about a request for proposal, that you wanted to go along with it. Do I interpret that this letter of your president at the time was meaning that you wanted to go along with the Paxport proposal, the unsolicited proposal? And if the government - probably you heard the rumour that there might have been a request for proposal. You didn't want to go that route because you felt that your company would be more or less auctioned to the highest bidder?
Mr. Fiore: First of all, we hadn't heard any rumours about an RFP. I guess at the time we were just pressed for time. We wanted to get our phase two of the redevelopment plans to go forward. And then, of course, as we all know later on in 1990, things started to change. The economic situation changed, I guess in 1991 especially. So I don't know what you are saying here as far as - I do not really understand your question.
Senator Hervieux-Payette: My question is what was your worry? Since you had an agreement with Paxport and then your president goes to the government. I mean, you were worrying that the government would not endorse the agreement you had with Paxport? I am reading that and your president was voicing his concern. It is not written. That is why I am asking. Why was he writing this letter if you were satisfied with your own negotiation with Paxport?
Senator Jessiman: They don't own the property.
Senator Hervieux-Payette: Can I have the answer from Mr. Fiore?
Mr. Fiore: I don't really know the answer. I don't know what this - I can't speculate.
Senator Hervieux-Payette: It is not speculation. It is a real letter written by your real president at the time voicing his concern.
Mr. Fiore: You are reading between the lines. I can't speculate on that.
Senator Hervieux-Payette: I am not reading. I am asking you. I am asking you, what does it mean? Does it mean - why were you concerned? Why was your president concerned that you would be held to ransom? For me these are strong words that your company would be held to ransom. By whom?
Mr. Fiore: Well, at that time we always wanted to make sure that we have the best deal from a cost point of view, and the deal that we had negotiated with Paxport at that time was the best one for us. That is what I can recall.
So we didn't want - you know there had been other unsolicited proposals that were submitted also to the government. See, this is - I believe there were three proposals submitted to the government. Not only to us but they were all submitted to the government. ADC submitted it, that was the owner of Terminal 3, and Canadian Airports Limited. So I guess we were saying this is the proposal we are supporting in that context, at that time in 1990.
Senator Hervieux-Payette: Okay. That is what I want to clarify, because the way I read it is that at one point you say, there is no doubt that Transport Canada must and will receive a fair and reasonable settlement, so that means you are in good faith. And the previous paragraph, you don't want to be held to ransom. There seems to be a threat in the first paragraph, and in the second one you say well, you know that we will be treated fairly, so I just say why was your president at the time writing that letter? Was there any facts that you know that would have contributed to this letter?
Mr. Fiore: I cannot recall.
Senator Hervieux-Payette: Except other proposals. And your president, as you say, was writing to say that we agree with that one but we are afraid of the other proposal?
Mr. Fiore: I guess that is correct.
Senator Hervieux-Payette: Did you have the other proposal?
Mr. Fiore: Yes. These people came to see us and gave us their proposals, and we evaluated them all. They submitted this to Transport Canada, I believe.
Senator Hervieux-Payette: I am trying to clarify what was the situation then?
Mr. Fiore: I think that was the context of that letter. It was saying, listen Mr. Minister, this is what we support. We are the biggest tenant, so this is what we can afford.
Senator Hervieux-Payette: I will continue with and skip a few months and days because I mean, one of the things that seems to have made problems in finalizing at the last stage when Paxport was awarded, after the RFP, Paxport was declared the best overall proposal and then brought to the negotiating table and then proceeded to become Mergeco with Claridge and created the new entity. It seemed that the major roadblock to finalize the signature of the contract was the guiding principle. So you came back as being one of the problems to finalize what was proposed by Paxport. I mean, they had proposed a certain level of rent, and, of course, this was something that seemed to be at the time maybe too high.
Since there was some reduction in some of the documentation - or no, some of the hearings before the Transport Committee, it was said by Mr. Morrison, there was a 15 per cent reduction so that you would finally agree.
So what I want to come at is that after May, June 1993 compared to what you had negotiated with Paxport in 1990, the terms and conditions of the guiding principle were almost the same in your first proposal that you agreed to?
Mr. Fiore: They were consistent, that is correct.
Senator Hervieux-Payette: They were consistent. But was there any cost attached to that? I have read the conditions that Transport Canada had with you. I have not read the one that you had with Paxport, but can we attach a cost to that?
Mr. Fiore: They had presented a business plan to us at the time. They came up with a cost which we were ready to accept at that point and time.
Senator Hervieux-Payette: Was there a big difference between the cost you had agreed with Paxport, first, their unsolicited proposal, and the costs that were included when they replied to the RFP and they were selected as being the best overall proposal?
Mr. Fiore: I suspect there was.
Senator Hervieux-Payette: So why would you not agree and be more or less the deal breaker or deal maker, because it seems from what we heard from Mr. Broadbent, who was the chief negotiator for the government, that he discovered all of a sudden that the government had almost - I mean civil servant, I don't know who - hidden from Paxport, and the new Mergeco, the guiding principles, and it was the same people.
I mean, we were dealing with maybe a larger group, but I am trying to reconcile the fact that you had an agreement with Paxport and there was no agreement. I mean there was difficulty to come to an agreement at the end of the day when Mr. Rowat took over from Mr. Broadbent.
Mr. Fiore: Our agreement with Paxport of June of 1990 was no longer valid. It was terminated as soon as the government did not accept - it was subject to government approval and our board of director approval. So that was terminated as it was never accepted. As soon as they said we are going off on the RFP, we sent them a letter saying, okay, that agreement is cancelled. We will now wait for the developers to come and talk to us during the request for proposal time.
Senator LeBreton: This is when you went into the so-called "arms length"?
Mr. Fiore: That's right.
Senator LeBreton: You didn't know who eventually you would be dealing with?
Mr. Fiore: Exactly. We did not participate in the RFP. Nor did we participate in the evaluation. We did provide our requirements though to Transport Canada. It is in your book here. That is the one I just referred to you before. It has all the terms and conditions that are consistent with the guiding principles.
Senator Hervieux-Payette: What I am asking you, can we put a figure on the guiding principle of the first proposal compared to the last one?
Mr. Fiore: We finally agreed with PDC now, not Paxport, PDC.
Senator Hervieux-Payette: Yes.
Mr. Fiore: There was a difference in cost. We were talking - see, if I remember correctly, when they approached us with this, when Paxport was selected, our rent was going to go up immediately. We had a lease still in place until May 1997 and that was something like - I think that represented - and I am only going by memory - that represented an increase rent of $147 million if we accepted on day one the way it was written.
Senator Hervieux-Payette: This is not the deal you negotiated with Paxport first in 1990? Would you agree to raise your rental fee by $140 million? Probably not?
Mr. Fiore: That is correct.
Senator Hervieux-Payette: That is what I want to know. I want to know why you had an agreement with Paxport and then we hear at the end of the day, 1993, that one of the difficulties was that your rent - of course you had a lease until 1997 that had to be respected or renegotiated, and of course you had to consent to that renegotiation.
But what I am saying is that since we were told that the people were not aware of the terms and conditions of your lease, plus your guiding principle and this was one of the big surprises of the negotiation team, I am asking how could they not know if they had negotiated with you before and came to an agreement?
Mr. Fiore: I guess you would have to ask them. I can't answer that. I don't know.
Senator Hervieux-Payette: Were they similar? Because you opposed them, so you are aware of them. You didn't want the government to go ahead with the new formula which would represent a big increase, and of course, since you had to consent they had to sit down with you and renegotiate to make sure you agreed to a new lease. But you had already agreed on certain terms and conditions in your previous discussions and negotiations with Paxport?
Mr. Fiore: It was a different - I mean I cannot recall that 1990 - to be honest with you I cannot recall the numbers in the 1990 deal with Paxport. It only included, to the best of my knowledge, phase two of Air Canada which was at that time about $250 million. Whereas the Paxport proposal to the government - in fairness to Paxport too, because they were asked to respond to an RFP which included Terminal 1, the government was really concerned that they had to fix Terminal 1. They combined the whole thing. That became $700 and some odd million dollars.
Senator Gigantès: With an immediate increase in your rents?
Senator Jessiman: Two years later.
Mr. Fiore: The deal that we negotiated - I don't know what you are talking about now.
Senator Gigantès: At some point you said immediate increase in rent and you didn't want that.
Senator LeBreton: No, that was a proposal.
Mr. Fiore: That is before. That is what I said in my opening. We could not support that increase at that point and time.
Senator Gigantès: Was that the time when you talked of being held to ransom?
Mr. Fiore: No, never said that. We are talking about 1993 now, not 1990.
Senator Lynch-Staunton: Don't consider the facts.
Senator Gigantès: Why would you think that somebody in your firm was saying he was concerned to be held to ransom other than the general attitude that if the people of Paxport were involved, they would be worried about being held to ransom by those people?
The Chairman: Senator Hervieux-Payette, could you wind up please?
Senator Hervieux-Payette: Unless my watch has stopped, I think I have not taken the time of the other side. Since I am the one who volunteered to prepare for questioning, I hope I have more than three minutes. Just because we go all around, I don't want to repeat the question.
Mr. Fiore, were you part of the negotiating team to finalize the transaction - the agreement in 1993? Were you there for both negotiations, the 1990 and 1993? Were you at the table of negotiation?
Mr. Fiore: Yes, that is correct.
Senator Hervieux-Payette: When they came back after the RFP process was on and the terms and everything had been laid on the table and Mergeco had to go and see you and visit you and negotiate an agreement because there were some items there that were placed, as I guess, options for rentals because in fact they had to have your permission to charge you these rentals because you already had signed a lease. The lease was in place, so if they wanted to change that you had to agree to that?
Mr. Fiore: That is correct.
Senator Hervieux-Payette: Would you say that the requirement that you submitted in preparation of the RFP were all met with the first bid or the second? I mean because finally we end up with a negotiated deal. We had both Paxport and Claridge together. I mean they were so much things that were merged together, not just the financial question was merged, but also some of the legal arrangements were merged, so would you say that all your needs were taken care of in terms of the new deal that was why they arrived at the table to renegotiate your lease and come into a long term agreement with you? I mean, what was on the table? What did you ask them to come up with? Did you have only problems with the financial question?
Mr. Fiore: I believe that - from a facilities point of view, is that what you are asking?
Senator Hervieux-Payette: Yes.
Mr. Fiore: Yes, they were meeting our requirements for the time. We finalized the deal. We even put in there that they didn't want them to start the next stage until we reached a certain threshold of passengers. We all came to an agreement. We had an agreement with PDC . We all sort of gave and take, I guess. I believe Bill Rowat used to say put a little bit of water in your wine. We all did and we reached an agreement for the three parties.
Senator Hervieux-Payette: Who gave away in that renegotiation? Was it Paxport or the government in terms of revenue?
Mr. Fiore: You would have to ask them that. I don't know.
Senator Hervieux-Payette: You were at the negotiating table, but you don't recall who was giving away some of the -
Mr. Fiore: We all did. Can I say something? We had $125 million of investment in the terminal at that point. Part of our deal we transferred a dollar for a dollar. That was our give. So we all came up to an agreement that satisfied us at that time.
Senator Hervieux-Payette: Did you have any document that you could supply to us? What were more or less your minimum conditions that would have to be respected during that negotiation?
Mr. Fiore: In fact, I believe you have them in - you have a copy of the actual agreement. But what I did is, based on the guiding principle, I came up with some guiding principles to negotiate a long term lease with PDC and presented that to them. I believe there is a copy in there, isn't there? PDC has that and I believe they sent it and it is all in these binders. So all those are spelled out. Those conditions are clearly - and I believe we met them all. I met on the conditions that we needed more or less, except that I had to give $125 million for a dollar. Transfer all our assets for a dollar. That is in the agreement.
Senator Hervieux-Payette: But you received finally a 15 per cent reduction in fees?
Mr. Fiore: That's not correct.
Senator Hervieux-Payette: Could you explain?
Mr. Fiore: Could I explain to you?
Senator Hervieux-Payette: That is your role.
Mr. Fiore: First of all, Paxport's proposal was based on a ground rent to the government in year one of about $29 million. That is the base rent. Then they had also a percentage part of the rent. That kept escalating. The greater the revenues, the greater the percentage.
In fact maybe 5 or 10 years later, it was going to be more than double, like $66 million dollars, just the ground rent. Of that ground rent, 64 per cent was to be paid by the airlines of Terminal 2 and Terminal 1. Okay?
The total passenger through-put of the two terminals - 70 per cent of that total through-put was Air Canada's responsibility. We represent 70 per cent at that time. So therefore, if you take $30 million, if you take 64 per cent, that is about $120 odd million. Then you take 70 per cent of that, $15 million would have been Air Canada's responsibility to pay.
What we negotiated with the government at the time was a reduction in that ground rent, 50 per cent reduction of that, and that was not just for Air Canada. It was for all the airlines that were going to operate in Terminals 1 and 2.
Senator Hervieux-Payette: Were the other airlines represented in that negotiation? Were you the only one representing the other airlines or were the other tenants also -
Mr. Fiore: I was negotiating on behalf of Air Canada because we represented 70 per cent of the two. You can understand that we were the anchor tenant. It is like any business deal, any development. You are going to deal with your anchor tenant. If you are going to build a shopping centre, you are going to deal with Eatons or The Bay first, your two anchor tenants. Then you will go out and sell it to the other tenants, and that's what Transport Canada did in this case. It was a business deal.
Senator Hervieux-Payette: I guess so. But I think it is important that we understand. Maybe it is your business to be in the airline operation, but it is not my business, so when you explain what you said a few minutes ago, that was never told to me by previous people exactly where it comes from, how it works and where it is located in the overall transaction.
After you made a gift of $125 or $120 million, how could you be persuaded to increase your rent? Because in fact you were going to have an increase in your rent?
Mr. Fiore: First of all, it was not a gift. That was part of the negotiations. What was the second part of your question?
Senator Hervieux-Payette: What prompted you - what did you receive in return? Because the deal was the same, you were not happy with the -
Mr. Fiore: What we were going to get was a brand new facility. We were going to have what we would have had by now, a transborder facility to meet our requirements, and we would have had an international facility later on in next phases to meet our requirements. We were ready to pay the increased rent for the new facilities.
Senator Hervieux-Payette: I understand from your presentation, the section by Mr. Durrett, is that at that time if the whole deal had been signed from page 14, the main east/west runway will be taken out of operation for temporary repairs. I mean, this would not have been solved.
It is being solved now, but the Terminal 1 and 2 question was not solving this question of runways?
Mr. Fiore: No, but there was another issue there. I mentioned that before. There was two projects going on. One was the air-side project. The government of the day decided to ask for the request for proposal for the new runways, and there were some bidders that put together, of which Air Canada put a bid in. That would have solved the air-side problem. We would have had a runway - improved taxi-ways and runway by 1997.
Mr. Durrett: That is true. The PDC negotiation and the long term lease that Air Canada signed with PDC had nothing to do with the runway or the air field side of Pearson airport.
Senator Hervieux-Payette: You did not secure to solve that problem when you signed a lease of that magnitude for such a long time? You expect also to be provided runways if you are running an airline industry.
Mr. Durrett: The lease negotiation with PDC - remember we talked earlier. There was just a very specified piece of real estate on the airport that encompassed Terminals 1 and 2 that involved the negotiation. The air field responsibility was never going to PDC, and Transport Canada would continue to own, maintain and provide air field facilities, so we had a separate agreement with Transport Canada involving the air field. That was not related to PDC in anyway.
Senator Hervieux-Payette: I will conclude my remarks by asking and confirming a question of my reading of the House of Commons committee hearings of May 31st. In that hearing -
Senator Jessiman: What year?
Senator Hervieux-Payette: This year, May 31st, 1994.
Senator Jessiman: This is 1995.
Senator Hervieux-Payette: No, 1994. It is page 8.8. I am sorry. You can laugh. But if you were operating in French -
Senator Lynch-Staunton: I was talking to my colleague.
Senator Hervieux-Payette: If you were talking to your colleague maybe you could talk a little lower.
Mr. Fiore: Page 8.8.
Senator Hervieux-Payette: I would like to ask you to confirm, because this is a year ago and it is a different person and we have the one of the higher executives in the company in front of us. It was asked if Mr. Neville had worked as a consultant or as a lobbyist for your firm for $120,000 a year. It says that this had been in place for some four years for general advice, monitoring and guidance. And if you remember, at the beginning of this session, I was referring to some memorandum from Paxport written by Mr. Neville from Mr. Hession and sending copies to Mr. Neville, so I would like to know, what is the time frame Mr. Neville acted in the capacity of this - as general advice, monitoring and guidance, and was he giving Air Canada advice on the whole question of the Pearson airport?
Mr. Fiore: May I answer that? We never - myself personally or on this deal never dealt with Mr. Neville on the PDC or the RFP for Pearson. This was strictly - Mr. Morrison, it was an arrangement they had on other issues. I think they were talking about just the airline industry, the restructuring of the airline industry and so on that was going on I think in 1993 and 1992.
Mr. Durrett: Mr. Neville was under retainer to Air Canada. However, he was not under retainer to work on our behalf on the Toronto file.
The Chairman: Could you wrap it up, senator?
Senator Hervieux-Payette: Who is Mr. Morrison?
Mr. Durrett: At the time he was our vice-president of governmental affairs in Ottawa.
Senator Hervieux-Payette: Thank you.
The Chairman: Last question is Senator Lynch-Staunton.
Senator Lynch-Staunton: I just want to take issue with you, Mr. Chairman, when you said this is the wrong forum for Air Canada to be here. Perhaps it was in some of the things they said, but certainly not the wrong forum in the assessment of the impact of the cancellation of the agreements.
Here we have before us representatives of the major tenant, the major investor, the major generator of traffic which has been severely prejudiced by an impulsive political decision to cancel agreements, particularly since there is still no alternative solution to the essential works which Pearson Development Corporation was willing to engage in.
And I think that here we are being told by Air Canada that their ability to meet customer's demands day by day are becoming increasingly more difficult as a result of not only the cancellation of the agreements, but by the fact that 20 months later we are at a stand still. They are stuck between Transport and their appeal to Transport Canada to do something, and the promise of the Greater Toronto Airport Authority will eventually be created.
Senator Kirby: Are you giving a speech or asking a question?
Senator Lynch-Staunton: I am doing both. I am following - I have seen that you are even better at it than I am, so I am just trying to follow the master.
Senator Kirby: Mr. Chairman, this is exactly what you told us we could not do which is make a speech, and I am just asking for a consistent set of rules.
Senator Gigantès: He can only talk in speech form.
The Chairman: This is preamble. I am sure at the end of this Senator Lynch-Staunton will say, do you not agree?
Senator Gigantès: Before 5:00 o'clock?
The Chairman: There is a question there somewhere.
Senator Lynch-Staunton: Mr. Durrett did tell us that in the meantime we have seen vast improvements in Cincinnati and Chicago. What should strike us is that he fears that if nothing is done in Toronto soon, Toronto, which so far had been able to maintain a significant role in overall international air transport, may lose that standing and become a second rate airport. All of this as a result of the cancellation of a significant agreement.
Senator Kirby: I thought you would have said a result of the delay of C-22. That is an accurate statement.
Senator Lynch-Staunton: All of this as a result of the cancellation of agreements. Do you agree that the cancellation of agreements has led to the impasse that we are in now?
Mr. Durrett: The cancellation of the agreements has definitely caused a delay in progress to expand and improve the airport.
As I have tried - whether it is the right forum or not - to say, that is not totally the end to the end. There are alternatives. We are prepared to work with whatever parties to implement those alternatives.
Senator Lynch-Staunton: But you were satisfied that the agreements that were signed in October 1993 would have greatly helped Air Canada meet the demands that are being put on it right now in a much more comfortable time frame than you are stuck with right at this moment?
Mr. Durrett: Air Canada's senior management endorsed and Air Canada's board of directors approved and Air Canada executed an agreement to do exactly that.
Senator Gigantès: I would simply like to thank the witnesses.
The Chairman: Go ahead.
Senator Gigantès: I wish to thank you for your help, for all the serious things you managed to tell us in a casual and informal manner without giving the impression that we are about to have a heart attack. Thank you for not speechifying.
The Chairman: Thank you very much, gentlemen. Thank you very much for coming. The meeting is adjourned until 9:00 a.m. tomorrow morning.
The committee adjourned.