Proceedings of the Special Senate Committee on the
Pearson Airport Agreements
Evidence
OTTAWA, Thursday, August 17, 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: Good morning, colleagues, ladies and gentlemen. Our first witness today will be introduced by the committee counsel.
Mr. John Nelligan, Q.C., Counsel to the Committee: Honourable senators, we have with us today Mr. Paul Stehelin, who is a partner with Deloitte & Touche. He's with us because during the course of the examination of the proposals and in the evaluation of the ultimate contract, he had been engaged by the Department of Transport to advise on various matters and has, in fact, presented one or two reports, which you may want to question him about.
The Chairman: Mr. Stehelin, you are aware of the fact that we have been swearing witnesses?
Mr. Paul Stehelin, Deloitte & Touche: Yes.
(Mr. Paul Stehelin, sworn:)
The Chairman: I think, Mr. Stehelin, that you have a brief opening comment.
Mr. Stehelin: I just have a brief opening statement.
What I've given you this morning - and I apologize for only getting it to you this morning - is a brief statement together with some documents that I, in reviewing all of my binders, thought were appropriate.
In early January of 1993, Deloitte & Touche responded to a Request for Proposals which was issued by the Department of Transport. You have a copy of that attached. Our response to the request is also attached, and it outlines the work that we understood we would be asked to do with respect to this.
I'm the partner with the firm who had responsibility for this file and was really the partner who was involved on a day-to-day basis.
In January, February and March, from our initial engagement, the focus was on the financeability of the transaction. It became apparent once we had become more familiar with the proposed transaction that the ability to achieve 100 per cent satisfaction of the financeability would not be possible.
The real estate market in Metro Toronto in 1993 was probably the worst it had been since the depression in the thirties. In addition to this compounding factor, there was a great uneasiness in the market around the aviation industry as a whole. A number of airline companies both in Canada and abroad were on credit watch or were in serious financial difficulty.
The uncertainty as to the nature of the transaction was also a compounding factor. It would be impossible to obtain firm commitments from financial institutions without their having a complete understanding of the transaction.
Options were discussed as to what evidence could be attained as to financeability. Attached is a little road map, kind of a decision tree that we used initially to try to determine the approach we would take to the whole financeability issue. The primary -
Senator Kirby: Can I just ask -
Senator Jessiman: We don't have copies.
Senator Kirby: I'm sorry. It's not just me that doesn't have the decision.
Oh, maybe it's one of the documents. Is it?
Senator Lynch-Staunton: David has a whole set there.
Senator Kirby: Is this your handwritten one?
Mr. Stehelin: No.
Senator Tkachuk: Tell me where it is. I might be able to get a copy out of here and distribute it around.
Senator Kirby: I didn't mean to interrupt you, but I thought -
Senator Tkachuk: I just came early, Senator Kirby, and grabbed it.
Senator Kirby: Oh. Have you got it there?
Senator Tkachuk: I'm not sure which one it is. There's quite a bit of paper here. I haven't had a chance to -
Senator Gigantès: You mean you grabbed it and hid it from us?
Senator Tkachuk: No, no.
Senator Kirby: Is this the one?
Mr. Stehelin: That's the one.
Senator Kirby: I just found it in the middle of this - I don't know if everybody has it. Did you get a big stack of - yeah, that's it.
The Chairman: Mr. Stehelin, how many copies did you bring in with you this morning?
Mr. Stehelin: Six.
Senator Kirby: Mr. Chair, we have one here between the two of us. That's fine.
Mr. Stehelin: It was in nice, pretty colour at one point.
Has everybody found a copy?
The Chairman: The first document you are referring to, Mr. Stehelin, is the -
Mr. Stehelin: The Request for Proposals. Then you have our response. You then have the confirmation of our contract. You should then have that little road map, what I referred to as the "decision tree", which is the little map everybody I think now has found. So if everybody is happy with that, I will continue.
The primary focus in the initial stages was satisfying ourselves as to the financeability of the Paxport proponents. This was done by contacting the various proponents, Wood Gundy, who were acting as financial advisors to Paxport, as well as discussions directly with financial institutions. This focus changed with the joining of Claridge.
The next time frame, I think, is really March through June 1993. Discussions really started to proceed April, May, June, and our involvement - particularly mine in the file - grew.
In reviewing my files, I think the most appropriate document that gives a flavour of the issues that were being negotiated by the parties is a memo dated June 21, 1995. You have a copy of it. It deals with all the outstanding issues that were on the table in the negotiations at that point. Most of the issues had or would have an impact on financeability.
In July and August, our active participation in the file basically culminated in our letter of August the 17, 1993, a copy of which is attached. We attempted to deal with a number of issues which we were asked to comment on by the department. Throughout the negotiations, we worked closely with Transport Canada and the Department of Finance staff.
I've also attached, because I thought it would be useful, a document you would have never seen - even if you had been through all the documents because I just developed it - a schedule indicating the rate of return on equities which utilities and monopolies were receiving in the 1993-94 time frame.
I would be pleased to try to answer any of your questions.
The Chairman: Senator Tkachuk.
Senator Tkachuk: Hi, Mr. Stehelin, how are you today?
I might be a little bit redundant. I just want to get some of the things on the record. So even though you've included it in your documents, I'm going to ask you about it.
Could you tell me the date or when you were retained by the government, by the Department of Transport?
Mr. Stehelin: The exact - we had some very preliminary meetings in I believe it was late December. Early January, the RFP came out. We responded on January the 6th, and I think the confirmation letter that you have in the little file I gave you is dated January 14, 1993.
Senator Tkachuk: Who retained you?
Mr. Stehelin: Who did we deal with?
Senator Tkachuk: Yeah.
Mr. Stehelin: I think our initial meetings were with Mr. Jolliffe. John Cloutier was involved, and the assistant deputy was - somebody will have to help me here.
Senator Tkachuk: The assistant deputy of airports?
Mr. Stehelin: I can find it in the binder here.
Senator Tkachuk: And Mr. Jolliffe?
Mr. Stehelin: Mr. Jolliffe was with airports. He attended the meeting.
Senator Tkachuk: Who was the third person who was assistant deputy of airports? When you say assistant deputy in the government, it could be anybody. Was it Mr. Barbeau?
Mr. Stehelin: Barbeau. There are so many assistant deputies on this file it sometimes get confusing.
Senator Tkachuk: It is confusing. Who was the third person?
Mr. Stehelin: John Cloutier was involved initially.
Senator Tkachuk: I know you enclosed a copy of the contract, but maybe you could explain to the inquiry, in as few words as you can, what your job was.
Mr. Stehelin: I think simplistically put, it was to do two things. One was to assist in evaluating and looking at the whole financeability issue, and the other as it's referred to in the RFP is generally to give whatever other assistance the department required with respect to this transaction.
Senator Tkachuk: So it was a consulting contract that was to go - was it to go through from the beginning of the contract in January to the completion or when the government said they weren't going to do it? Is that sort of it?
Mr. Stehelin: The way it was initially set up was to be done in phases. The way it evolved was it just grew. I mean it started out with the financeability issue and then other issues that would affect financeability. Basically for the period of March through the end of June, I did nothing but work on this file.
Senator Tkachuk: So you ended up being almost an advisor?
Mr. Stehelin: Yes.
Senator Tkachuk: Financial advisor.
Mr. Stehelin: I wouldn't even - I mean, I basically tried to give useful input on anything I was asked to give useful input on.
Senator Tkachuk: When I ask - it's always difficult in government, as I'm finding out, but did you have someone that you were responsible to in the department, like somebody who actually signed the contract, sent you a letter of instructions, or is it like all the rest I've experienced in the last month?
Mr. Stehelin: I don't know what you've experienced in the last month, but -
Senator Tkachuk: I'll tell you in a minute.
Mr. Stehelin: The contract was let by whoever it is in the department who signs contracts.
Senator Tkachuk: Right.
Mr. Stehelin: I think our direct working relationship was originally - if you were to try to draw a responsibility, we were really responsible initially to Ran Quail, who was heading up the negotiations.
Senator Tkachuk: Yeah.
Mr. Stehelin: And that just flowed from there as the other people came in who were leading the charge on the negotiations.
Senator Tkachuk: You mentioned in your week 1 - on the proposed work plan that you distributed this morning, week one - there's no document because it's from the stuff that was distributed this morning - that we would complete - I'm quoting your work plan:
...we would complete four worksteps which would lead to a preliminary assessment.
Assessment of what?
Mr. Stehelin: Well, for us to do anything meaningful, we had to understand and look at what it was proposed the transaction would be. So we had to understand what it was that was trying to be done here, particularly from the question of whether or not it was financeable.
Senator Tkachuk: Okay. So is that what resulted in your first report of March 2nd? Was that the result of that?
Mr. Stehelin: I mean the thing unfolded as it went forward. It was a little bit of a dynamic process, as you can probably appreciate.
Senator Tkachuk: So what you tried to do, just so that I understand it, is that you were advising the government, and then you would send information and memos as you progressed on your work.
Mr. Stehelin: We didn't - the nature of what was going on because of the process itself wasn't one where you could conveniently draw lines in the sand and say, "Now it's appropriate to say A, B, or C." Initially it was Paxport standing alone. Then Claridge came into the picture, and then other issues arose.
So the documents that you have that we prepared were trying to deal with issues that we felt were appropriate to deal with initially, particularly from a financing point of view, and then it evolved from that really.
Senator Tkachuk: In your document of March 2, 1993, which is 00291, dated March 2, 1993, on the first page: "We noted that there is an apparent difference in the projected development approach implied in the request for proposal and that submitted by Paxport."
What was implied?
Mr. Stehelin: I think there was generally a perception that what you had here was an $850 million transaction and that somehow you were magically going to be able to stamp some good housekeeping stamp of approval on that and say "Yes, they have $850 million." That's not what you had. What you had was a project financing, not a green field sort of turn key operation, and that was really going to be developed over a period of anywhere from eight to ten years. No financial institution, nobody was going to commit to $850 million guaranteed, no matter what happens.
Senator Tkachuk: For anybody.
Mr. Stehelin: For anybody. It wouldn't matter who it was. You know, so what you had was you had to try to dissect the transaction.
I think there was a mindset that said, "Well, if the government can write a check for 850 million, there must be somebody else out there who can, and let's just go and get him to say he'll write a cheque." Impossible. That's not the real world.
Senator Tkachuk: So in the RFP, was it so much stated, or was it more the expectations of the department?
Mr. Stehelin: I don't know. I wasn't involved in the RFP process or the evaluation.
Senator Tkachuk: Right.
Mr. Stehelin: There's no question that - that's just my personal view that there was this perception that somehow, you were magically going to say somebody, "Yes, I'll write a cheque for $850 million." The real world doesn't work that way.
Senator Tkachuk: Right. We all know that, but in the proposal of Paxport and in the competing proposal, they enunciated how they felt they were going to finance their proposal.
Mr. Stehelin: Well, I assume they did. I mean, I can't recall off the top what the details are.
Senator Tkachuk: None of them said they had -
Mr. Stehelin: A request for proposals.
We received an RFP. We responded to that RFP. What we actually ended up doing at the end of the day doesn't necessarily reflect to every period and every "i" what was in the RFP. This was project financing. At the end of the day, that's what it was going to have to be. You were dealing with a live, breathing airport, a huge risk, and that's the only way you could do it. Now how everybody was going to approach that, that was their call.
Senator Tkachuk: On page 2 of that report, you mention the involvement of T3LPCO Investment Inc. as a participant in the project. Is that the Claridge Group?
Mr. Stehelin: Yes.
Senator Tkachuk: Did you sort of find this out as you were going through, or was it just sort of -
Mr. Stehelin: I'm like most people. I found out as it came through.
Senator Tkachuk: During the middle of this report of the 17th, you knew they were involved, but you weren't quite sure.
I don't want to put words in your mouth.
Mr. Stehelin: The March 2 -
Senator Tkachuk: The March 2 letter, yeah.
Mr. Stehelin: By March the 2, everybody knew that what you had here was an agreement had been reached between Paxport and Claridge, for want of a better - that T3LPCO I always have trouble with, so I call them Claridge.
Senator Tkachuk: Yeah, that's what I do too. This will be very helpful.
Mr. Stehelin: There was an agreement. I had seen the agreement. I had seen the letter of intent, so I knew what generally the agreement was between Paxport and Claridge.
Senator Tkachuk: When you mention financing the total project outright, which is the $850 million, it's a little confusing for me when I read it because if you have the $850 million, you build it all, but we know that would be very difficult because you'd have to close down a whole portion of the airport. So was that what - like I'm just a little - if you could just sort of help me sort this because you started real well at the beginning.
Mr. Stehelin: Go to the decision tree. If you look at this, I mean it's the simplest approach we could come up with.
You start with a question: Can you finance 850 million? If the answer is "yes", you know, that's very simple. If you could just get a simple answer that says, "Yes, I know this person or people can write a cheque for $850 million, get on with it," there's no more issue. If the answer is "no", I think the view of Wood Gundy and I think the view of any other financial person that you were to bring before this committee would be that nobody is going to give you a guarantee for 850 if you are looking to go to the market and raise that money.
That leads you to the second possibility, which is can it be partially financed, which is the circle under "NO". If you get a government backstop, you can go back to "YES".
If the government were prepared to guarantee this transaction, my opinion changes. The position of the government was, "No, we are not providing any financial support to this financing - i.e., we are not going to provide a guarantee." So it leads you back to can it be partially financed? Yes. Our view was yes, that you could do it on a staged, basically construction kind of approach.
If "yes", that you can partially finance this going forward, what are the issues and what things do you have to deal with to get from where you are today, which was in 1993, to 1996?
The way we initially chunked it down was we said their plan called for, up to 1996, debt of 285 million and equity of 60 million. Beyond that, they were going to have to incur another $330 million in debt, and they would have to raise another $40 million in equity.
To get them through the first hurdle - i.e., the first phase on this little decision tree - which was debt of 285 and equity of 60, you had the timing issued around rehabilitation of Terminal 1. You had to deal with that. The lenders were not going to be comfortable unless they knew exactly how you were going to tear down, keep an airport operating, and rehabilitate because that was a major component of that first phase. You had to deal with the users, being Air Canada, of T1 - major users, major source of cash flow.
Did they want to do the deal? Were they prepared to enter into a new lease? If so, what were they prepared to pay because that was going to affect your financeability.
You had to deal with the employee issues. You had to deal with performance guarantees. How were you going to ensure that they in fact carried out what they agreed to carry out in stage one and two, as it turns out? And you had to cover yourself with respect to "yourself" being the Crown. What would you do if they defaulted? Those were the big issues you were going to have to deal with.
When you look to the second 330, you needed to raise the $40 million equity that they were going to have to do. The whole transaction was structured on the basis of 75 per cent debt, 25 per cent equity - not unreasonable in this kind of transaction. Okay? So to get them to the second stage, they had to find $40 million in equity. Okay?
The performance was going to have to be as stated it would be in the first phase. No lenders were going to come in and put up another 330 million if they hadn't done what they said they were going to do in the first part because it was likely the lenders in both scenarios would be the same lenders. Okay?
Traffic growth. If you didn't have the revenue, the lenders weren't going to put their $330 million in there, and you couldn't go with a 75/25 debt-to-equity split.
One which was really a constant was the whole uncertainty around what was going to happen in the airline industry generally, not just in Canada, but worldwide. So that led you to saying, "If I can deal with these issues on the 285, I can say that's financeable." Okay?
Senator Tkachuk: Yeah.
Mr. Stehelin: If they perform and you deal with these other issues - growth. I mean nobody wants to build another Mirabel, especially not somebody who is in the private sector and is lending money. Then, yes, you could do the next phase.
So that was the approach and that was trying to explain to people why in the real world you couldn't get an absolute 100 per cent guarantee for $850 million.
Senator Tkachuk: The proponents - and I'm using both of them here because we're dealing with both of them at this time - you mentioned Wood Gundy being involved and another partners. They, themselves, understood how they had to finance the deal and that they had to overcome certain roadblocks before they could proceed to the next stage.
Mr. Stehelin: "They" being the proponents?
Senator Tkachuk: The proposal winners and the proposal losers, who are now -
Mr. Stehelin: Claridge and Paxport knew what the problems were. They are big boys and they knew what they were going to have to do to get the financing, yes.
Senator Tkachuk: As time progressed and you went to - I notice that in August you produced another note or another memo on the 17th to Mr. Rowat about financeability. It has a different flavour, but still, business to be done, as obviously you were proceeding through the contract. Under "Financeability", you have:
In our view, the transaction as presented in the 7/23/93 financial projections of Mergeco is financeable.
Was this because over the summer months they had begun negotiations or they had gotten rid of some of the problems or they had agreed to staged development? I understand your reluctance at first because there was no contract negotiations at the beginning, but now we're into August. Were you satisfied now, as their advisor, providing you were meeting certain conditions that you mention on page 4, that this is a doable deal?
Mr. Stehelin: Do I think the deal was doable?
Senator Tkachuk: Yes.
Mr. Stehelin: Now I hate it when people extract something from a letter and don't deal with what goes before it.
Subject to all of the things that are in that letter saying these are the issues and our understanding is they have been dealt with in the final agreements, the transaction is financeable.
Senator Tkachuk: Okay. I understood that, yeah, that you had - what you were pointing out as an advisor, then, was that these issues had to be resolved.
Mr. Stehelin: Let's go to the real world. It's now 1995.
Senator Tkachuk: Yeah.
Mr. Stehelin: If they had started the project in 1993, there would be a raging debate today as to whether or not they would be going into the next phase because the traffic levels at Pearson are only now getting back to - they didn't meet everybody's expectation of where they might be in the 1995-96 time frame. So assuming the traffic grew generally as everybody thought it was going to grow - and nobody's crystal ball in that area has been any better than anybody else's. The industry's hasn't been any better than Transport's and vice versa. But assuming the traffic was growing - one of the problems is that the traffic hasn't grown the way everybody thought it was going to grow. It has grown on trans-border and international. So if the traffic grew and they did their development, yeah, the thing held water if they could get the money; but, if the traffic stayed exactly where it was in 1993, you were going to stop at a point and say, "That's it; we're going to wait until this thing makes economic sense."
Senator Jessiman: Could I just ask a question to help us with all of this?
You have said that the equity is 25 per cent and the debt 75.
Mr. Stehelin: Roughly, yeah.
Senator Jessiman: So that that's approximately an equity of two hundred and twelve thousand five hundred, debt of six thirty-seven five hundred. I've just looked at this debt equity here and the debt equity here and the debt equity here in these figures, and in one case it's 82 debt, 17, 89, 10.8. How do we get to the 75/25?
Mr. Stehelin: The difference is what they were going to have as equity on their balance sheet from operations.
Senator Jessiman: Is the kind of money -
Mr. Stehelin: This is new money they were going to have to go out and raise or somebody was going to have to write a cheque.
One of the big concerns on the second phase when you look at the final transaction was that their projections showed that they were not going to have the cash for the second large debt transaction. That led to a cash reserve being required in the transaction.
Senator Jessiman: That's the 5 million?
Mr. Stehelin: Of $5 million.
Senator Jessiman: How does that grow to 28 million?
Mr. Stehelin: Just compounded interest. Just put 5 million in every year and take the interest. They weren't allowed -
Senator Jessiman: Oh, you would put in in each year.
Mr. Stehelin: Yes.
Senator Jessiman: Because I did the interest calculation and didn't get to 28, and I didn't have to be -
Senator Kirby: I had the same problem. I was just doing it in my head.
Mr. Stehelin: That was one of my better ideas, for better or worse.
The problem was that when you looked at the projections, you had this trough, year three. The balance sheet didn't look great, and it wasn't. You know, we were being asked would financial institutions lend on this transaction. When we looked at the numbers, we said they're going to have a problem with that. Okay?
Now there's a number of ways you can deal with that. You can get a guarantee. You can get a letter of credit. You can set aside cash. You can restrict dividends. You can do a whole bunch of things. In fact what happened in the final transactions is a lot of those things - my position was, "I want to know they got most of that 40 million bucks when they get there." Okay? That was the compromise that came out.
Senator Jessiman: Where is the 84 million that Claridge has advanced here somewhere?
Mr. Stehelin: The $84 million sits on T3's balance sheet. It's debt that Claridge put in when T3 was built.
Senator Jessiman: So it's a debt to Claridge?
Mr. Stehelin: Yes.
Senator Jessiman: I see.
Senator Kirby: That's my understanding. I've never seen the documentation.
Senator Jessiman: And they had a positive clash flow, and they had a fairly good balance sheet?
Mr. Stehelin: T3 has always had a positive cash flow. Even in 1992-93 it had a positive cash flow.
There was a backstop guarantee given by the Crown for a line of credit. I think it was 20 million or so. That's never been used. So T3 was doing quite well.
Senator Jessiman: Did you say "given by the Crown"?
Mr. Stehelin: Yeah, in the T3 transaction.
Senator Jessiman: I didn't know that. They would not do that for this transaction, though.
Mr. Stehelin: No. They were not prepared to do that. There was no backstop guarantee.
Senator Jessiman: So that was another thing that was best on the other transaction.
Mr. Stehelin: But T3, even with the Canadian scenario that was happening at that time, had always had a positive cash flow.
Senator Jessiman: All right. Thank you.
Sorry, but that clarifies it for me. At least I hope it did for some of the others.
Senator Tkachuk: I just have one question. Chairman, I will come back to this. I think I'm over my time here, but I have one last point.
On page 6 - I'm sorry. On page 8 of the memo of August 17, which I've referred to before, you conclude that an after-tax rate of - and I'm assuming that this is return on investment - 12 to 16 per cent is reasonable.
Mr. Stehelin: Yes.
Senator Tkachuk: What led you to that conclusion? I know it's in the documentation, but I'd just like to get it on the record. I could read it maybe, but I don't want to really do that because I think you can just sort of sum it up. You just have a number of points here.
Mr. Stehelin: You can get into a huge, profound, convoluted discussion about return on equity.
Senator Tkachuk: I'm sure we will today.
Mr. Stehelin: There is no comparable. The only comparable in the world to this transaction is the British Airports Authority, okay, which is a publicly traded company. It's listed on the stock exchange in the United Kingdom.
Senator Jessiman: Are all the shares out now, or did the government own some of them?
Mr. Stehelin: No.
Senator Jessiman: They are completely sold.
Mr. Stehelin: The British Airports Authority is totally public. It's subject to review every five years. Let's deal with that one first.
Senator Jessiman: Sure.
Mr. Stehelin: They published a report which, if any of you want to get really bored and read, is this document. This is the document from the monopolies and mergers commission that reviews the British Airports Authority every five years.
Senator Jessiman: Does your international firm act for them?
Mr. Stehelin: No.
The monopolies and mergers commission is a government body. The purpose of that review is to review the rates that are set by the British Airports Authority.
Their rate of return - and this is 1991. If you were to apply it on the same basis as would be applied in a monopoly situation in Canada, their permitted rate of return is 16 per cent.
Senator Jessiman: After or before tax?
Mr. Stehelin: After tax.
Now they are attracting capital. They do major projects. That is what the British monopolies commission has satisfied is a reasonable rate of return.
Senator Jessiman: It sounds to a lot of us as a high rate of return, but there's a lot of risk involved. I mean you don't get that kind of rate of return -
Mr. Stehelin: Again, we can get into this discussion and it can go on all day.
The British Airports Authority and the monopolies commission that does this considers - its interesting. They consider them neither high nor low risk. I'm not sure what that means. The reason they do that is because only a certain percentage of the revenue, as would have been the case with Pearson - as is the case with Pearson - is a monopoly kind of revenue. Okay? A lot of their return that falls to the bottom line does have risk attached to it. How much does each person leave behind in the airport as they walk through? They have a huge number in Heathrow. It's something like 25 pounds for every person that walks through there. They leave that behind in the airport. That has nothing to do with everything else. Okay?
Senator Jessiman: And I thought we were going from $2 to $7.
Mr. Stehelin: No, the $2 too $7 is what the cost to the airlines is.
Senator Kirby: He means money spent in stores.
Senator Jessiman: All right.
Mr. Stehelin: This is just what people leave behind in the duty free and pick up a tie and pick up a shirt and pick up a teddybear and pick up a diamond ring. It's a huge, huge number. Those prices, by the way, are effectively the same prices as you would pay in London. Okay? So that's a risk factor because the amount of money people will leave behind is dependent on how they feel about themselves and what's happening in the economy.
In any event, the British Airports Authority - it's a confusing document, but if you were to try to put it on the same basis, the British Airports Authority itself will not look at a new project that doesn't give them an 18 per cent return after tax. They won't enter into a new terminal construction or anything else that doesn't give them 18 per cent after tax.
DS Marcil did a study which you may have seen in the documents you got. They say 14.5 per cent is a reasonable rate of return. Okay? That was the runway study. If somebody were going to go and finance this and put money and equity on the table, that's a reasonable rate of return. Okay?
I've given you a little schedule. It's the last sheet that was attached to the package. I'm not the particular individual that deals with the regulatory authorities and appears before regulators all of the time. That's an individual partner in our Toronto office who was involved in this.
What you've got on that schedule is really what happened in the Canadian utilities or the regulated industry sector between 1993 and 1994. Okay?
Now, Wood Gundy's position in 1993 was that utilities were between 11.5 and 12.3 per cent. That's what they said a pure monopoly would be looking for and would be allowed to have as a rate of return. These numbers are always after tax because you can never figure out precisely what - the tax becomes a number that's variable depending on the structure of the entity, on its ownership and on a whole bunch of other factors - how much debt it has, et cetera, et cetera. So most people who deal in this always deal on an after-tax basis.
Senator Jessiman: Okay.
Mr. Stehelin: You can go down the list.
What's interesting about this as well is you get some sense of how much equity all these monopolies have and what they were looking for in terms of equity. But if you took British Columbia's utilities commission, B.C. Gas, their return on equity is 10.75; Pacific Northern, 11.5. This will vary up and down depending what's happening generally in the financial markets. To some extent it's a cost of "could I get more if I put my money somewhere else" because you are always trying to attract capital or equity. So they vary, but generally they are between, you know, 11 and 12.25, 12.5, et cetera.
What happened in late '93 and into '94 was rates went down, as we know, and that will impact that rate.
To give you some sense of that impact, in the eighties these rates of return were 14 to 17 per cent because the interest rates were higher.
What also impacts it is what their debt-to-equity ratio is. In other words, the more equity, the lower the required rate of return, right? It's theoretically a more secure investment because the equity is at risk first. That gives you a sense of what happened in the marketplace.
As I say, in the eighties it was 14 to 17 per cent. If you prepared the same kind of schedule for the mid to late eighties, you would be in that range. As I say, it's a function of where rates are. If you were to do it today, it would probably be higher by three-quarters or a point or something like that because the interest rates are higher. The benchmark is always Government of Canada bonds on the same term. So everybody always talks about how much more it would cost you than say 10- or 20- or 30-year Government of Canada bills.
The Chairman: Senator Tkachuk, you and Senator Jessiman have shared this and taken up 30 -
Senator Jessiman: I asked one question.
The Chairman: Well, you've asked more than that.
Senator Jessiman: I'm sorry. I haven't even started.
The Chairman: That's 34 or 35 minutes. How much more time do you want?
Senator Tkachuk: My last point is - I want to come back, but I want to think about what he said. I'm almost done my half hour, and I don't want to get into the next. Why don't I just pass and go to the next person. I may come back. I'm not sure, though.
The Chairman: Senator Kirby, then, it's 35 minutes.
Senator Kirby: I realize he was over time and it wasn't bothering me anyway. That's fine.
Senator Tkachuk: It bothered me, Michael.
The Chairman: On the first round, Senator Kirby. We can come back.
Senator Kirby: I'm going to do things not in sequential order because I really want to pick up on a point that Senator Tkachuk raised and you just commented on.
Given the data, the chart you gave us, as you said, the average was 11 to 12.3 - 10.5 to 12.3 I guess is what you said. The 14 per cent that you calculated in your August 17th report is higher than the range - it's clearly higher than the range - but do you regard it as extremely high or just kind of a little bit above the range?
Mr. Stehelin: No. I think based on the risk factors that were associated with this transaction, based on the level of equity they we're talking about - and the risk factors were things like - anybody who believes that an airport is a pure monopoly doesn't understand airports. They are influenced by market fluctuations. Okay?
Senator Kirby: Although given the passenger diversion guarantee, it was in effect a monopoly up to 33 million passengers.
Mr. Stehelin: No.
Senator Kirby: In the sense that Hamilton couldn't be developed; you couldn't develop Pickering.
Mr. Stehelin: No. A monopoly says that you can pass through any costs.
Senator Kirby: Oh. So you're using "monopoly" in a different sense.
Mr. Stehelin: I'm only using "monopoly" in the financial sense.
Senator Kirby: Okay.
Mr. Stehelin: I mean your definition of "monopoly" from a political sense is probably different than mine.
Senator Kirby: No, but you're using "monopoly" in the sense that the customer has absolutely no other option.
Mr. Stehelin: To put it a little bit definitely, the monopoly, the entity, always has the ability to pass through 100 per cent of its cost. Okay? In a true monopoly situation - Ontario Hydro, if its costs go up, it has the ability - customers might not like it -
Senator Kirby: Because it's an essential service.
Mr. Stehelin: - but it has the ability to pass through 100 per cent of its costs.
In this situation, as in British Airports Authority as another example, they could only pass through - on the basis of just taking the financing costs, just take that portion, they can only pass through 75 per cent of that. That's probably where they were going to end up. So there is a portion at which the market will say "yes" or "no". If you charge $14 for a hot dog, the market has the ability to say "no". Okay?
Senator Kirby: In calculating the rate of return, which is obviously based on the amount of money the investors make, do you take into account the fact that they may be paid a variety of different kinds of fees - management fees, consulting fees, all kinds of other things? Is that included as part of their rate of return, or is this a return to them in some other way that's not included in the IRR?
Mr. Stehelin: You're now into a whole different issue. You are into the issue of the $84 million, and you are into the issue of fees that were going to be paid to various parties who were members of this transaction.
Senator Kirby: Right.
Mr. Stehelin: There are two components. Let me just comment on the 84 million. The interest payments or the debt repayments on the 84 million are not in the 14 per cent.
Senator Kirby: Okay, I assumed that.
Mr. Stehelin: They were debt in Terminal 3. The only way you can get at that number and say you don't like that number is to say Terminal 3 wasn't worth 600 million or whatever, but assume that that's not in the 14.
The other factor is what were people going to be paid aside from a return on their equity? Okay?
Senator Kirby: Correct.
Mr. Stehelin: All right. There were basically three kinds - I guess there were really three kinds of things. There were construction fees. There were fees that were to be paid to people for doing the development and doing the construction. Those are not included in the 14 per cent. Okay?
Senator Kirby: Okay.
Mr. Stehelin: If you look at the partnership agreements between the parties and you get into the fine print of the final transaction documents, the way those were dealt with, the way everybody attempted to deal with those, particularly Claridge - they were more concerned with that probably than anybody was - was it had to be fair market value. So if the normal construction fee -
Senator Kirby: On the construction side.
Mr. Stehelin: On the construction.
Senator Kirby: What about the consulting fees?
Mr. Stehelin: The words that they used as among themselves and that everybody tried to reflect and carry through in the agreement were that it had to be fair market value. You know, that's always an issue. How do you decide fair market value? That's how they tried to deal with that.
Senator Kirby: For example, there was a consulting fee of 350,000 bucks a year for 10 years to one of the Matthews companies. There was a $4 million minimum to Paxport International Inc. for promoting Canadian development expertise. There was another management fee to the Pearson - management company of several million dollars. Did all of those fees get included, or were they over and above the 14 per cent?
Mr. Stehelin: Okay, now, you've got to break those fees down into two kinds. Some of those fees were to cover - when you look at the projections and you get into the numbers, some of those fees were to cover expenses of the airport that were going to be assumed by management. So for the simplest one to understand, the accounting system was going to be dumped that was there now. The government system was going to be thrown out the window, but you needed an accounting system. That was to be integrated with the T3 system. There would be one system, and they would charge the terminals a fee for that. Okay? There's that kind of thing where they were substituting one expense, and it was buried in a number called "management fee". So that's one component of it.
The other kinds of fees where you're talking about development fees or 350, those are not in. They would have been abnormal expenses. They weren't presently or directly related to operating the airport.
Senator Kirby: Therefore, they were money to the investors over and above the money they would get as investors in terms of the rate of return?
Mr. Stehelin: Some of it, yes.
Senator Kirby: Therefore, to your extent, your number underestimates - I'm not saying you are wrong. I understand exactly what you did from an accounting standpoint, but from an overall point of view, your number significantly underestimates the amount of money they would have actually gotten.
Mr. Stehelin: Well, I would not say it "significantly underestimates".
Senator Kirby: I am happy to take out the word "significantly".
Mr. Stehelin: You have some things - the way the partnership documents were structured, okay, they were structured in such a way that the intent among the partners - you've got to remember, by this time, some of the partners who had a very large position going in had a very small position coming out.
Senator Jessiman: They were at arm's length too.
Senator Kirby: No, the consulting fees were not at arm's length.
Senator Jessiman: Sure they were.
Senator Kirby: I'm sorry. They were not at arm's length. They were all - the ones I asked them -
Senator Jessiman: They were.
Senator Kirby: In fairness, the ones I asked them about specifically -
The Chairman: Let's stop this.
Senator Kirby: All I'm saying, Mr. Chairman - he said they were at arm's length. All I'm saying is that Matthews Investment Inc., Paxport International Inc., Pearson Airport Management Inc., et cetera, are not arm's length transactions. That's all I said.
Senator Jessiman: With Claridge they are at arm's length.
Senator Kirby: Oh, with Claridge. I'm sorry. I didn't hear you say that.
Senator Jessiman: Claridge had to approve them.
Mr. Stehelin: The only answer I can give you is that you have to deal with this transaction from all of the partnership agreements at the top all the way down. If you don't deal with it as a total, then you can pick apart any paragraph in these agreements. If you want to deal with anything in isolation, you can do so.
Senator Kirby: In fact, I've been trying to avoid doing that.
What I was trying to say is on page 6 of our August 17 one - I just want to make sure I understood what you meant by the follow sentence. You say:
Certain construction management fees to the Matthews Group during the development and other consulting fees for various services to other members of the group are not included in the IRR calculation of 14 per cent.
I just wanted to make sure that I understood the fees.
You then went on to say, by the way, that you were going to be reporting on those and commenting on them under separate cover. Did you ever do that?
Mr. Stehelin: No.
Senator Kirby: You did not do that. Okay, because we didn't have it. Okay.
Ross, can I go back, then, to start of my document C.
I'm actually going to give you a piece of paper just to make it easy, but I've just numbered them so that I can give them to my colleagues easily.
This is a report on a phone conversation you had with Donald Matthews on February 11, 1993. I must say you do terrific summaries of phone calls. Like it's really easy to understand, which is a good thing because it was a complicated transaction.
When you spoke to Mr. Matthews, the memo of your phone conversation makes it clear that what you were attempting to do was to understand where his $20 million in equity was going to come from, and that while he told you that he had made separate - and I'm quoting from your memo:
MGL -
Matthews Group Limited -
- has made separate arrangements with one of its affiliated companies to fund $20 million that is to be invested on the turnover date.
But as it's clear from reading the rest of the memo, he didn't really tell you where the 20 million was going to come from; is that right?
Mr. Stehelin: That's right.
Senator Kirby: Why didn't he tell you? What do you think the rationale was?
Mr. Stehelin: I think everybody now knows where it was coming from. I think - I mean you could be totally Machiavellian and say he didn't want to tell me because it was a deep, dark secret. If you read his agreement with Allders - he had made an agreement with Allders that they were going to fund the $20 million.
Senator Kirby: And he made that agreement in June of 1992, and this is February of 1993, so he knew - I mean he made the deal to get the 20 million a long time ago.
Mr. Stehelin: Well, it would take a long time to answer.
Senator Kirby: I just want to get the date in, that's all. It was made a long time ago.
Mr. Stehelin: The agreement speaks for itself.
Senator Kirby: Okay.
Mr. Stehelin: He had made an agreement with another party. I asked him where the $20 million was coming from. If I wanted to be kind, I could say he wasn't entitled to disclose that unless he got the permission of Allders. As it turns out, it's Allders who gave me that document, not Matthews.
Senator Kirby: That's interesting.
Mr. Stehelin: Because it was a document that, as far as they were concerned - whether they had concerns with respect to the other partners, I don't know. I can't make a judgment on that.
Clearly, my job was to satisfy myself that there was $20 million available, and somebody telling me they have $20 million, I'm sorry, doesn't do it.
Senator Kirby: Doesn't help very much.
Mr. Stehelin: So it got dealt with, and we found out where the $20 million was coming from.
Senator Kirby: I guess the answer is to ask Mr. Matthews why he didn't want to -
Mr. Stehelin: I can't impute anything.
Senator Kirby: I didn't know if that had subsequently come out.
Let me ask you a question about where that leads because when you have the 20 million - Matthews shares in Paxport were pledged against at least a portion of that $20 million alone; is that correct?
Mr. Stehelin: That's correct.
Senator Kirby: You have to help me through this because I get confused on these business transactions here. If Matthews had failed and therefore Allders had wound up with the shares, what percentage would that have left - that would have, in effect, left Allders in control of T1T2, in a controlling position; am I correct? I got that in part - I will tell you what I got that from.
This is a chart, document F. This is simply a chart that you had drawn that attempts - thank God you did it because I was trying to do it without this. This attempts to show the shareholdings of various players coming into Paxport. If Allders had acquired the Matthews shares by virtue of default, that would have left Allders with over 50 per cent. Am I right on that?
Senator Jessiman: Paxport or Pearson?
Senator Kirby: Paxport.
Senator Jessiman: This is the first deal.
Senator Kirby: Right.
Mr. Stehelin: If Matthews had defaulted and Allders had taken the shares, you would have had Allders in control.
Senator Kirby: Was Allders a Canadian company? Do we know that?
Mr. Stehelin: Allders is owned by - it's a Canadian-controlled company. It's 49 per cent - Allders PLC is a publicly traded company.
Senator Kirby: In the U.K.
Mr. Stehelin: In the U.K., and I believe they own 49 per cent of Allders Canada.
Senator Kirby: That's what your documents say.
So you think that that - it's kind of complicated. What I'm trying to understand because - and the other 51 per cent was owned by Agra; is that correct?
Mr. Stehelin: That's correct.
Senator Kirby: Is Agra a Canadian-controlled company.
Mr. Stehelin: It is, yes.
Senator Kirby: In this investigation, sometimes you can have 49/51 situations in which someone else is actually truly in control even though someone else owns the majority of the share. Do you know who was actually controlling Allders Canada? I mean you didn't have to look - I tell you why this is a question. The RFP was extremely explicit about it having to be a Canadian-controlled company that got the transaction. I'm trying to understand whether under this scenario that if Matthews defaulted and Allders got control, did that leave the control of the operation in the hands of a company that wasn't eligible to bid under the RFP?
Mr. Stehelin: I think the answer to that question is nobody knew the answer to that question, but I'll tell you right now -
Senator Kirby: Nobody knew.
Mr. Stehelin: - this issue became a very big issue in terms of an unwillingness to permit that structure to go forward in the final transaction.
Senator Kirby: Sorry. It became a big issue with -
Mr. Stehelin: In the negotiations, because the position taken by the Crown was "u-uh", we are not going to find ourselves in the position - never mind about Canadian control - where a major tenant controls the airport.
I can tell you right now, this issue was a long and hard one. I was not a very popular camper when this issue came on the table. I mean everybody was not happy that this was a big issue.
When Claridge came in, obviously it became virtually a non-issue because what happened was the control aspect disappeared because Claridge owned 50 per cent and they owned 50 per cent. That possibility disappeared.
The way it was also dealt with among - was that nobody could have more than 15 per cent if they were "at non-arm's length", and two -
Senator Kirby: Nobody could have no more than what?
Mr. Stehelin: 15 per cent.
Senator Kirby: One five. I thought that's what you said.
Mr. Stehelin: The other aspect was that until this was done, until this whole development was finished, you can't go off and flog your interest in this. That led to days of discussion and negotiation around those issues. It was a very big issue at the time it became apparent that the scenario you've described could arise.
Senator Kirby: But the scenario I described could have arisen - I understand how you got around it when Claridge got in. Prior to Claridge coming in - ie., looking at the actual response to the RFP by Paxport when Claridge was not a part of Mergeco but Paxport was on its own - then it could have arisen. Under those circumstances, the response to the - you would have had to outlaw Paxport from bidding by virtue of it conceivably not being Canadian controlled.
Mr. Stehelin: I don't know how you get from it may have happened to you would outlaw them on an RFP. It was an issue. There was a lot of discussion around when Claridge was not at the table - ie., in the initial stages when people were trying to figure out how to go forward with this. "How do we deal with this issue because we can't let it happen?" It was as simple as that. There wasn't discussion around whether it fit with an RFP. That was not the issue.
Senator Kirby: It became the issue to settle it farther down.
Mr. Stehelin: "Here's a problem; we have to deal with this issue."
Senator Jessiman: But 51 per cent of the shares were owned by Canadians. Am I correct on that? You said 49 per cent by the British.
Senator Kirby: These are publicly held companies, so we don't know who owns them.
Mr. Stehelin: Allders Canada?
Senator Jessiman: Yes. Could it have possibly been owned by foreigners as well?
Mr. Stehelin: Allders Canada is 49/51.
Senator Jessiman: And the 51 is owned -
Mr. Stehelin: The 51 is owned by Agra, which is a Canadian company.
Senator Kirby: The problem we have is that we've seen deals - I don't mean on this one, but we've seen deals where you have 49/51 in which a Canadian in theory owns the 51, but the actual controlling interest by virtue of the agreement between the players is different. The RFP specified not only ownership, but it also specified control.
Senator Tkachuk: I think the issue wasn't ownership so much as that they were major leaseholders of the airport.
Mr. Stehelin: It was both. This was information that nobody had until that point in time.
Senator Jessiman: But Agra owned 51 per cent at all times. Agra is a Canadian company.
Mr. Stehelin: To the best of my knowledge.
Senator Jessiman: And it owned 51 per cent?
Mr. Stehelin: Yes.
Senator Tkachuk: Agra is a Saskatchewan company, now in Calgary. I keep reminding people.
Senator Kirby: To pick up on your comment that this ultimately became what you called a "big issue", fundamentally, what was the issue people were arguing about?
Mr. Stehelin: Well it was two-fold, I think. One was the default where you would effectively have Allders. I mean Allders deals with Transport Canada. They are in virtually every airport across the country. They run all the duty-free shops, and you were going to have a major tenant who was controlling the airport. At that point, the decision was very simple - "No, that's not going to happen; that's not acceptable."
So people tried to come up with - before the issue went away because Claridge was there. Even Claridge acknowledged that they did not want a conflict in their partnership agreements. They didn't want a conflict between a tenant and the airport. Wherever they had those situations, they had a structure in their partnership agreement to deal with that.
So it was really an issue - that was where the discussion was, and there were all kinds of ways of dealing with it - ie., if they had to realize their shares, they had to divest - I mean you can negotiate a whole number of ways to deal with the problem.
As I say, it turns out that that control, the 51 per cent issue, disappeared when Claridge came to the table. It was no longer an issue. There were enough issues without trying to keep them on the table at that point if they were not issues.
Senator Kirby: What was the reaction of Paxport to your first report?
Mr. Stehelin: I don't think they liked it very much. They thought we were just going to stamp it "Okay, carry on."
Senator Kirby: Did they essentially question either your credibility our your firm's credibility?
Mr. Stehelin: I mean, I have lots of people that tell me I don't know what I'm doing, so that doesn't bother me.
Senator Kirby: Welcome to the club.
I wonder if I can turn - well, I tell you why I asked that question.
Do you have document G, Ross?
This is actually an internal government memo, but it's dated March 12th. It gives a response to the people's view of your work.
If you'll just look on the second page where it says "Reaction of Paxport". It says:
Paxport officials met... with Mme Labelle -
that was the Deputy Minister of Transport -
- and expressed outrage at what they see as bureaucratic stalling.
It then says:
Paxport questioned the credibility of everyone, including Deloitte & Touche.
It goes on to say:
...Paxport has increased their pressure via PMO and ministers.
In the course of this discussion, did Paxport ever attempt to - since the word "pressure" is used there - to put pressure on you vis-à-vis your analysis or to argue that you shouldn't be doing what you were doing?
Mr. Stehelin: The only answer I can give you - I had one very unpleasant meeting with people from Paxport.
Senator Kirby: How many times did you meet with them?
Mr. Stehelin: Through the negotiations, every day, but during this time frame, dealing with this issue - and it was, "If there's no problem with any of this, just give me the stuff."
Senator Kirby: Sorry, I don't understand.
Mr. Stehelin: "If you are upset with this, I've asked for stuff and you prove I'm wrong." I mean, that's very simply.
Now, you get people who try to pretend they are more important than you are and that's fine, but beyond that, other than telling everybody I didn't know what I was talking about and we didn't know what they were talking about, fine. "Go get me the information; I'm easy."
Senator Kirby: So they were obviously not happy when you concluded that they had some problems with their financing, I presume?
Mr. Stehelin: Well, we stated what we felt the issues were. We felt these were the issues, this is what we knew, this what had to be dealt with, and they had to deal with it. It wasn't up to us to deal with. It wasn't up to the government to deal with. They took that as being an affront, or however they took it. But in terms of whether they had some minister or somebody else phone me up and try to beat me up, no.
Senator Kirby: I wouldn't have suggested that. I just didn't know what their attitude had been in terms of -
Mr. Stehelin: They returned my calls a lot quicker after that.
Senator Kirby: Leverage works.
Mr. Chairman, I have one other issue I want to raise, but I think I'll wait until Senator Tkachuk is finished and come back. Wasn't I right on 27 minutes or something like that?
The Chairman: Yes.
Senator Jessiman: I want to skip ahead a bit because I want to deal with the cancellation of the agreement, but there are a couple of questions I would like to ask.
I think you did agree, and the senator agreed, that Claridge and Matthews' people deal with each other even though they are partners at arm's length. Claridge isn't just going to give money to the Matthews Group. I'm talking about the consulting. Whatever they did, they would have to earn it, would they not?
Mr. Stehelin: I can't speak for Claridge. Clearly Claridge doesn't have to make their first billion. They have already made it.
Senator Jessiman: That's right.
Mr. Stehelin: And they didn't make it by, you know, simply giving money away and doing things that didn't make sense. You know, they are very sophisticated people. They had sophisticated people work on this thing. When you look at the documents, you know, it was a concern of theirs. Sure it was.
Senator Jessiman: Okay, that was negotiated and that's how it worked out, right?
Mr. Stehelin: It was a dynamic process. That's right.
Senator Hervieux-Payette: Just a supplementary on that.
Senator Jessiman: Sorry.
Senator Hervieux-Payette: I've seen a lot of figures, but is there a document, besides what we are referring to, that we were given with regards to your involvement with this transaction that would simply tell me - and I will give you my simplistic way of looking at it - where are the profits and so on?
I was just imagining what I was talking about two days ago. Let's assume I build a house or buy a house and negotiate with the contractor a $200,000 house. We agree that he is going to make a 10 per cent profit, so $20,000. Then, after that, I realize that he's associated with his brother-in-law for carpet and is making a profit there. He is associated with his wife who has draperies and so on. The whole house, in terms of procurement of the house, is related to the contractor. At the end of the day, through different mechanisms related to this unit I'm dealing with, I realize that it's not 10 per cent but it's 20 per cent. You say to me - and I'm just returning your comments - you say, well, this is standard business practice.
Well when we are paid - and this is something that I've seen also in telecommunications with Bell Canada. The more they spend, when you make a return on the investment, of course the more money you make. However, when you talk about cost control and you talk about the bidding process, when you were not at arm's length - normally because you are contracting for yourself and then you have a return. Do we have the real figure of how much money was made with all the contracts - I mean whether they were management or construction - that were given to the parties in that deal?
Because as far as I am concerned, this is what is not clear to me. Because if you sell a unit, $3 million, and this is the fair market value, but at the same time you sell it to yourself, you make a profit, a fair-market-value profit on a $3-million unit that goes into your - and then, you make also a profit on the investment.
So I just say, this is what is not clear for me. How much money and profit was generated in the first phase, which was construction? And then, over the year, as far as the operation, and then - so there is a profit there, that continues year after year on the operation side or the management side. And then there is a profit to the investors.
I don't seem to see the real figure. Maybe you have it, and maybe you can provide it -
Senator Jessiman: Would you -
Senator Gigantès: Please. Don't interrupt.
Senator Hervieux-Payette: I am asking to clarify, because you are asking the same question.
Senator Jessiman: There is money - and I am sure the witness will agree. The investors are those that put up the money, and they are getting a return -
Senator Hervieux-Payette: Can I have the answer from him? I am asking the question to Mr. Stehelin.
Senator Jessiman: What's the question?
Senator Hervieux-Payette: The question is: How much money went to the contractor, to the operator and to the people who invested? So it is not a very difficult question, but I'm saying, we are always talking about a return to the equity, but this contract has generated more than just that profit. That's what I am trying to find out. Because they were not at arm's length when they were contracting.
The Chairman: All right. Let Mr. Stehelin take his time and answer the question.
Mr. Stehelin: I understand your question. The simple answer to your question is this: Is there a simple piece of paper that gives you an answer? No.
Having said that, all of those numbers and all of those costs are in the projections, okay, that - I usually refer to them as the August 15th projections, which seem to be the last sort of ones. You've got to remember that these projections, as things were negotiated in and out, changed.
I mean, these numbers were being run every night during the negotiations, okay?
I understand your question. Can that be done? Yes, you can do that. You can pull out all of those costs. Okay?
Were those issues dealt with during the negotiations? Yes. Okay? And by various groups, because you had various people with various expertise. The construction people was a 5 per cent management fee on construction. I mean, were those reasonable?
I think you could get that information, if you took the time and went through it. The easiest place to find it would be to ask somebody to pull that out of the projections.
There's two things that happened in the numbers, to try to help you. There was no return on this project for the first 10 years to the investor; they got zero. In fact, if you tried to calculate it, it was a negative return almost.
The major components of the construction costs and those fees were built in. Lockheed's management fee is built into the numbers. But whether Lockheed managed the airport or somebody else did, somebody was going to have to manage the airport.
To use the analogy of your house, if, at the end of the day, you didn't buy your carpets from the related party but you bought them from another party, so long as they were generally the same price, it shouldn't make any difference to you, right?
So what you have to try to do is, first of all, I think you're entitled to understand what all the fees are, and I think you can get those out of the numbers. There were costs that were deleted. There were costs that were added. The numbers changed. There were different things that changed. When you start to put money in, it changes all the equations. There is no simple sheet that has that on it.
At the end of the day, though, when you looked at the whole transaction - if you want my personal view - there was no return to anybody in the first 10 years. That was the high risk part of this transaction, okay?
It was high risk for a number of reasons, because there was a lot of uncertainty about traffic levels. There was a lot of uncertainty as to what you could tear down, how you were going to do it. Airplanes are fragile. They don't like to run into things, and they don't like things running into them.
When you look at the rate of return as you move out, during the 47 years, the one anomaly that's wrong with those projections that everybody tried to cover in the agreement was, there is not an airport or a building standing anywhere else in the world that, 25 years later, you don't have to put as much money into it as it cost you to build it.
When you look at the rates of return in this transaction, that's not factored in. What happens is, the debt gets paid off by year 25. And then this thing looks like a milch cow. It's going to do nothing but print cash, right? And that's where the rate of return is.
Now, it has to be huge, because when you present-value that back, the longer you go out to get your rate of return, the bigger it has to be to give you something that's meaningful today.
The big flaw in those numbers - from my perspective, the big risk in those numbers was, 25 years out, to maintain a world-class facility, they were going to have to spend $800 million. It wasn't in the numbers. Okay?
So when you take all of that and you play around with it all and you've looked at the construction fee of 5 per cent and all of that, you had to balance all of that.
And so, I think, if you can get somebody to give you those numbers, so you understand it, try to factor in that other stuff. Because it is a long, long time before there is any meaningful rate of return on this thing.
And, you know, that was the nature of the problem everybody faced. Because it's not a simple transaction. It is not easy to rebuild an operating airport. Not very many people try to do it.
Senator Hervieux-Payette: But all the costs that entered into construction, from the first initial investment, there was no bidding process that would put at arm's length the people who were building.
Mr. Stehelin: That was built into the partnership agreement.
Senator Hervieux-Payette: In fact, that is my point, Mr. Chairman. How did we know it was the best possible price for the -
The Chairman: Senator, I will put you down as another questioner, because you've had a long supplementary.
Senator Hervieux-Payette: Well, I was not too long. I think I got a good, long explanation.
Thank you for the explanation.
Mr. Stehelin: The information is there.
Senator Jessiman: I want to go ahead in time when Mr. Nixon was appointed in early November or late October of 1993.
Did you meet with Mr. Nixon?
Mr. Stehelin: No.
Senator Jessiman: Did you talk to him on the telephone or get any letter or anything from him?
Mr. Stehelin: Somebody phoned me and asked me whether I'd been involved, and I said yes. And they said, "Would it be possible to talk to you," and I said, "By all means, whenever you want to talk," and I never heard from anybody after that.
Senator Jessiman: So you heard from some person that was representing Mr. Nixon?
Mr. Stehelin: Yes.
Senator Jessiman: Now, I know there is a report to Robert Nixon from Crosbie & Co. Inc., and, in that report, it says:
Since being retained by you at the beginning of November to provide financial advice in connection with your review of the transaction entered into by the Government of Canada with Pearson Development Corporation for the redevelopment of Terminals 1 and 2 (the "project"), we have...
And then it lists a number of persons that he has talked with. In the third one, he says:
...(iii) had conversations with Deloitte & Touche in their capacity as advisors to Transport Canada in this transaction...
And I assume that is correct?
Mr. Stehelin: Well, the only conversation I had with anybody - and I can tell you this because I thought it was - anyway - was: Was I the person involved? Yes. Would it be possible if we wanted to talk to you, to talk to you? Yes, by all means, whenever you want to talk. Okay, thank you very much, good-bye.
Senator Jessiman: And that's all that was done? And was the person that you talked to from Crosbie & Co.?
Mr. Stehelin: I don't know.
Senator Jessiman: He didn't tell you.
Mr. Stehelin: The only thing I can say is, when I look at Mr. Nixon's report, Deloitte & Touche is not mentioned, so.
Senator Jessiman: Did you see the Crosbie report? Did you see it?
Mr. Stehelin: I've seen both of them, yes.
Senator Jessiman: And let's then look at - I'd like to just deal with the Crosbie - and he emphasized rates of return. You know, the three - he said, you know, that he thought it could be considered high in these circumstances. And he gives a utility. And then he gives a real estate transaction, although he didn't talk to anybody in real estate, as you know, if you have - and you have read it, right?
And also, he compares with the return at Terminal 3, although he qualifies that by saying: Notwithstanding I am saying this, the people at Transport Canada have said it is probably not a comparable because of different circumstances.
I would just like you to tell me what you think of what Crosbie has said in respect - well, the whole report, if you can comment on it at all; and, also, in particular, the rate of return.
Mr. Stehelin: Are you talking about the Nixon report as opposed to -
Senator Jessiman: I am talking about the Crosbie report.
Mr. Stehelin: I've never seen the Crosbie report.
Senator Jessiman: Oh, I opened it and I asked - maybe you didn't hear me.
Mr. Stehelin: I've seen the Nixon reports, but I haven't seen the Crosbie report.
Senator Jessiman: Well, then I can't ask you any questions - well, maybe I can. Maybe I can.
Well, it makes it difficult for you, but what he's saying - he said, we reviewed - I'll just read this out to you so that it's on the record, and then you'll have it. It's too bad I don't have a copy for you. Maybe we should make a copy so the witness could -
Mr. Nelligan: I have a copy here.
Senator Jessiman: Can you give him a copy? It's page 4.
I'm going to just read it into the record. On page 4, where he is giving us three examples:
We reviewed with Deloitte & Touche, financial advisors to Transport Canada in this project, their analysis of required returns on equity in utilities...
Is that a correct statement?
Mr. Stehelin: No, they never reviewed them with us. Certainly not with me. If they reviewed them with somebody else in the firm, I'd be very surprised, but they never reviewed them with me.
Senator Jessiman: And if someone else in your firm had been interviewed, wouldn't they have told you?
Mr. Stehelin: There would be only one other individual, and I know for a fact that they never reviewed it with him.
Senator Jessiman: I'm going to keep reading it, and you can just follow me along, if you would.
...the kind of return that would be required on equity in this project. The reason for this approach is that from a return on equity point of view, there are certain similarities in the financial risks associated with this kind of project and those inherent in a utility. Accordingly, an analysis of utility returns can provide a benchmark to assess the kind of returns on equity that could reasonably be required in the proposed project after adjusting for differences in the nature of the businesses and associated differences in financial risk.
Deloitte & Touche indicated that in their view the after tax return on equity in high grade utilities in today's markets is in the range of 9% to 10% In August 1993, Deloitte Touche indicated that such returns were moving to the 10.5% to 11% range and over the 12 months prior to that, they had been in the 12% to 15% range. Under the rate structure in the capital markets at the time, for a project such as this where there are additional risks compared to high grade utilities, they felt that a reasonable after-tax return on equity would be in the range of 12% to 16%...
I assume they certainly read your letter.
...Adjusting these percentages for the approximate 1% decline in after tax utility returns since August 1993, would suggest a range under current market conditions of 11% to 15% per cent after tax on equity. This compares with the 14.2% projected after tax return on equity for the project as discussed above.
So he is saying, as far as you are concerned, it is the same as a utility or in that range. So he is not disagreeing. But he now goes to - and I want - if you can speak of these next ones:
In addition, this project, from a financial risk point of view, also has similar characteristics to that of a major income producing real estate development. Accordingly, the kinds of returns required for investors in major income producing real estate developments may also provide a general indication as to the types of returns that would be required to raise equity in the project after consideration for differences in the nature of the proposed project from major income producing real estate developments as these affect financial risk.
For year nine, after the completion of the development of the project at the end of year eight, the project is projected to have an operating cash flow before debt service of approximately $111 million. Using a capitalization rate on this cash flow of 9%, the project would have a value at the end of year nine of $1.23 billion prior to debt.
Now, he uses 9 per cent. And didn't you use, in this project, 10.5?
Mr. Stehelin: Well, he is talking about two different things, though. He is talking about capitalization rate, and you are talking about a discount rate.
He is saying basically, that if you - you know, I think the important part is this sentence:
...While one could debate the choice of capitalization rate...
He used a 9 per cent cap rate. I can tell you right now, in Toronto, you would not get a lender in any real estate deal to lend to you on that kind of cap rate in 1993.
Senator Jessiman: What kind of a rate, do you think? What's your best guess?
Mr. Stehelin: They weren't interested in your capitalized value. They were interested in cash flow and debt servicing.
The whole real estate market, especially in Ontario, and the way lenders look at it, has changed significantly. His cap rate, in my opinion, in the markets then and now, even today, is too low.
Senator Jessiman: Give us it then.
Mr. Stehelin: Ninety-three.
Senator Jessiman: What would your guess be?
Mr. Stehelin: If you could get a bank to lend to it, they would be simply looking at the cash flow.
What happened was, when inflation got beat up and there wasn't inflation anymore, real estate became a terrible investment, okay? And it's still a terrible investment.
Senator Jessiman: I know.
Senator Kirby: You noticed that was said with some passion, did you?
Mr. Stehelin: The way values were determined by real estate people and by the banks, and having lived through Royal Trust, I can tell you, you had cap rates of 9 and 10 and 11 and 12 per cent, you couldn't get a buyer for it. You couldn't get a buck a square foot. You can still lease triple-A space today in Toronto for $10 a square foot. At the height, it was $35.
What happened during this period - the big difference and the big concern that we had throughout, and it is what led to that cash reserve concept and making sure that the cash flow was there, at least in the initial stages - was that the cap rates became academic.
I think his cap rate is too low. That's my opinion.
Senator Jessiman: I'm just going to read the rest of this, to do with the real estate - and if you'd like to interrupt me, if you think there's something there that you agree with or disagree with, I'd like you to interrupt me. Can you do that?
You have read that sentence about the debate of choice.
Assuming a weighted average cost of capital of 13%, the value for the project of $1.23 billion at the end of year nine, and after considering the projected $484 million of additional new funding required to complete the project over the next eight years, the present value of the project would be $120 million. Accordingly, based on these numbers, the investor's investment of $66 million would have a current value of $120 million. A weighted average cost of capital of 13% implies a before tax return on equity of approximately 20%, assuming an interest on debt of 8.5% and a debt to equity ratio of 60:40.
Are those reasonable numbers for him to use?
Mr. Stehelin: It's just a calculation. The problem is when you try to factor in the tax impact. It is very, very difficult to do. And that's why, when you look at the utilities and the rates of return I gave you - I mean, these are actual. We have the luxury of looking back with hindsight, as opposed to arguing about what is going to happen in the future. These are real rates of return. They are always calculated on an after-tax basis.
If you want to put that into the calculation - and we refer to this in our letter of August. Let's try to be reasonable here. If we want to put their rate of return after tax, or before tax, let's do the calculation for our rate of return, being the government, on the same basis. Okay?
It becomes somewhat of a mug's game, because you never know what's going to happen with income taxes, as we all know. We sure know they don't go down. So it becomes kind of a funny calculation. I never - to me, taxes are like, you know, everybody pays them so they're meaningless.
Senator Jessiman: Let us go generally - he's referring to real - you consider this, you know, the airport on a similar basis as you would a real estate transaction.
Mr. Stehelin: There's no question that this transaction, to a great extent, was a real estate transaction. No question. No question.
Senator Jessiman: But to some extent, it had other risks.
Mr. Stehelin: It had other risks and it had other safeguards. It had pros and cons. But essentially what was required, at least initially, was bridge financing to do the construction. And the real risk in that part of it was that construction risk. All the rest became - you know, anybody's crystal ball 20 years out is as good as anybody else's.
Senator Jessiman: I'm just going to make reference to the Nixon report where it says - and I want you to comment and see whether you agree. It says, the developer's rate of return, in brackets, could well be viewed as excessive. I'd like you to comment on that.
Mr. Stehelin: We've given our opinion. That's his opinion.
Senator Jessiman: And you don't think they're excessive. Is that right? And that the Crown's return was far from overwhelming.
Mr. Stehelin: I don't agree with that. Our letter speaks for itself.
Senator Jessiman: Thank you. I'm not sure I've covered this, but I'm going to ask again.
Your assumption for financing was 10.5 per cent. Is that correct?
Mr. Stehelin: That was the assumed rate in all the projections. It wasn't our assumption. That's what the market was doing at that point.
Senator Jessiman: Right. Could you tell us how you got there? How did you get to 10.5?
Mr. Stehelin: Well, 10.5 was - I think, that was tied into Wood Gundy. That was Wood Gundy's opinion of what they felt they could do with the life companies that they'd talked to. They had talked to the life companies who had done Terminal 3. Because really, the only people who had done any of this financing when this transaction started were the lenders on Terminal 3 who were all life insurance companies. And that was their view of what they could get 20-year money for.
That calculation was used, I think, both for the long-term debt and the bridge financing. It was sort of market at that time. It wasn't something we calculated. I mean, that's what the market was.
Senator Jessiman: Mr. Crosbie states that the interest costs should be 8.5 per cent. So the 200 basis points - what a difference. You can do quite a thing with 200 basis points.
Mr. Stehelin: I don't know how much money Mr. Crosbie has ever raised in the public market. If he knows more than Wood Gundy and what the market was doing, that's fine. That's his opinion. Wood Gundy's opinion and our opinion - I mean, Government of Canada 30-day treasuries, I don't know what they were trading, but if you want to use the cheapest money you're going to get, that's what you go to, the benchmark.
I have no idea off the top what Government of Canada's trading at.
Senator Jessiman: Eight-point-five, I understand, 1993.
Mr. Stehelin: If Government of Canada's were trading at that, then Mr. Crosbie does not agree with DS Marcil, he does not agree with Price Waterhouse, he does not agree with Wood Gundy, he does not agree with us.
Senator Jessiman: That's all.
The Chairman: Senator Kirby, you had a -
Senator Kirby: I did, Mr. Chairman.
I'd like to refer to document H. I have to do this so my assistant gives you the right piece of paper. This is a document - it is actually a memorandum to the Prime Minister from Glen Shortliffe who was secretary to the cabinet at the time - dated March 5, 1993. So three days after your report.
And its headline, its title at the top - other than "Memorandum for the Prime Minister" - is "Update on the Redevelopment of Terminals..."
And you will notice, on the bottom of the first page, there's three bullet points which purports to summarize your findings. I wonder if you might do two things: Just read from "Update" down to the bottom of the page into the record, and then just tell me whether you think its a reasonably accurate summary of what - let's see if PCO are capable of summarizing your documents properly. As an old PCO employee, I'm always curious to see what the performance record is.
Mr. Stehelin: Do you want me to read this in?
Senator Kirby: Yeah, I think it would be useful to read it in. I just want to know whether or not the Prime Minister had an accurate summary of where you were.
Mr. Stehelin: Deloitte & Touche has reviewed Paxport's financing plan and written to Transport (copy attached) raising a number of significant concerns including:
the additional $61 million of equity is not firm: Ellis-Don has withdrawn its commitment for $8 million; the $15 million participation from Allders International is conditional, among other things, on Allders receiving the duty free lease now held by the LCBO (a condition which may take some time to be met); and the $20 million Matthews Group Limited contribution will be actually be financed by a loan from Allders;
Bullet number two:
the debt financing remains conditional on both the equity financing firming up and Paxport coming to terms with the existing tenants; discussions with Air Canada, the main T2 tenant, have not advanced very far and no discussions have been held with other tenants.
Deloitte & Touche's conclusion is that, "unless these issues are resolved, we cannot provide assurance to the Crown that the project can be financed".
Senator Kirby: Is that an accurate summary of your report?
Mr. Stehelin: I think so. It is a brief summary of page 3.
Senator Kirby: So you don't disagree with them?
Mr. Stehelin: There are some other issues I might have added.
Senator Kirby: Do you want to then - I just want to make sure, first of all, that the Prime Minister had the correct update.
Do you want to read into the record the top paragraph on page 2, because I want to ask you a couple of questions about it specifically.
Mr. Stehelin: Transport met with Jack Matthews of Paxport on March 3 to discuss the Deloitte & Touche assessment. Mr. Matthews questioned the need to demonstrate financeability at this point. He argued that Paxport's lack of progress on financing is the federal government's fault; in not unambiguously declaring it the winner in the RFP process, the government had undermined Paxport's credibility and negotiating position with Air Canada. Consequently, the carrier will not negotiate seriously with Paxport. He requested that Transport set aside the financeability question and immediately commence negotiations on the lease for the terminals.
Senator Kirby: As I read that paragraph, what Mr. Matthews was saying is, number one, he didn't need to demonstrate financeability; number two, that the progress in solving the financeability problem is not his, it's the government's. And it's the government's because the government didn't unambiguously declare the winner, but actually insisted on them establishing financeability. And other evidence, before you came here, has shown that he also blamed the government for not having solved the Air Canada problem.
Do you really believe the financeability problem was the federal government's fault? Sorry. Do you believe it? That's what Mr. Matthews was saying. I am asking you -
Mr. Stehelin: Do I agree with Mr. Matthews' comments?
Senator Kirby: That's what I'm asking you.
Mr. Stehelin: No.
Senator Kirby: Can you tell me why you don't?
Mr. Stehelin: He had to prove that he had the $61 million. That's the first issue.
Senator Kirby: Is that an unreasonable request?
Mr. Stehelin: In my view? No.
Senator Kirby: Clearly he thinks it is, but you don't think it is. Okay.
Mr. Stehelin: Well, we all try take funny positions in trying to negotiate a transaction. But he clearly said it shouldn't be an issue; don't agree.
Senator Kirby: Is that the only - sorry, you started to say something and I interrupted you. You said that the first thing he had to do was prove the $61 million, which you don't think is unreasonable. Anything else in that paragraph you disagree with?
Mr. Stehelin: I don't think that the government was undermining Paxport's credibility in dealing with Air Canada. Air Canada are sophisticated. I have negotiated with them. I know how they operate. They are tough negotiators.
Senator Kirby: But professional.
Mr. Stehelin: They are professional. And why would they sit down with anybody until they had some sense of what the deal was and put all their cards on the table? I mean, that wasn't a government issue alone. It was an issue for everybody on this thing. Because, without Air Canada on side, the financeability question would raise its head again. You would come full circle.
Senator Kirby: This seems to suggest - and other evidence, not so much this one, but other evidence has suggested that Paxport thought that dealing with Air Canada ought to largely be a governmental problem. From your point of view, having dealt with Crown corporations in various deals, who do you think should have had responsibility for solving the Air Canada problem?
Mr. Stehelin: If you look at our issues that we felt the government had to deal with, versus issues that Paxport had to deal with - and I don't know whether you have a copy of it, but there was a presentation that we did to Huguette Labelle and basically said, look, there are some issues you've got to deal with, and there are some issues that they have to deal with. Air Canada was one of those funny ones that fell somewhere in between, because they had to negotiate their own transaction.
Senator Kirby: They being Matthews. Just to be clear. I was just trying to be clear who "they" was. The company.
Mr. Stehelin: Air Canada clearly had a lease until '97.
Senator Kirby: Yes.
Mr. Stehelin: That lease had certain terms and conditions, and it had to be dealt with. It provided a certain amount of cash flow, et cetera, et cetera, and it was in the numbers.
They had to deal with Air Canada on the improvements that Air Canada had done. It was Air Canada who put the $65 million into Terminal 2. They had to deal with that. Air Canada presumably was going to amortize that over some longer period of time than three years. That was not necessarily a government issue.
Senator Kirby: Right. It was a business issue.
Mr. Stehelin: The government issue that had to be dealt with is, there was a comfort letter to Air Canada that basically implied that Air Canada would be able to go on for an extended period of time, and don't worry about it. That was a government issue. That was an issue that the government had to deal with, because the developer had no knowledge of that at that point.
Senator Kirby: Well, evidence would suggest that's debatable, but I understand they said they didn't have it. Okay.
Mr. Stehelin: If they had knowledge, then they didn't have it from anybody who was involved in the negotiation. But that was a government issue. But Air Canada was crucial to this transaction, the single biggest user. If you didn't come to some conclusion, assuming that the parties were acting in good faith on both sides of the table trying to negotiate a transaction, it was in everybody's interest to deal with Air Canada.
But clearly around the new lease, what they intended to do, how the development was going to be done, Gate 80, the transborder, all of that stuff, the proponent had to sit down and sort that out with Air Canada. It wasn't the government's job.
Senator Kirby: Any other comments you want to make on whether you agree or disagree with pieces of that paragraph?
Mr. Stehelin: No. It's a fair reflection, I think, of what the situation was at the time.
Senator Kirby: Mr. Chairman, to save me having to call the document again, I want to read into the record Glen Shortliffe's handwritten note at the bottom which says:
Prime Minister: I've been having some conversations on this file on which I will report to you orally.
That way, it's in the record, and we're in a position that we can ask Mr. Shortliffe about it.
I think perhaps we should also point out to members of the committee that this memo to the Prime Minister was dated March 5. Yesterday, we had a document 00189 which was dated March 4, the previous day, reporting on a conversation between Mr. Joliffe and Mr. Desmarais in which it says, among other things, and I am quoting:
ADM's view is that Shortliffe is trying to orchestrate something but not sure what.
I guess this was the beginning of the orchestration but, in any event, we can deal with that when Mr. Shortliffe comes.
The Chairman: Those are memos from?
Senator Kirby: The one I've been quoting, the one I've just distributed is a memo from Mr. Shortliffe to the Prime Minister. The document 00189 which was used yesterday with the panel is a conversation - a report of a teleconference between Driedger, Heed, Desmarais, Barbeau and Jolliffe.
Senator Tkachuk: Can I ask a question on this memo? When you started quoting this, this is a very interesting memo. This is a memorandum for the Prime Minister from Mr. Glen Shortliffe, the Clerk.
I mean, this document would normally not see the light of day. So - and I know it was in our bundles because when I got it, I looked at this thing and thought, now, this is highly unusual.
Senator Kirby: The piece that is advice -
Senator Tkachuk: I'm not denying that we got this. I want to ask counsel why do we have memorandums - remember, we had that discussion? I had that discussion before on a piece of advice coming up. This is a letter from the Clerk to the Prime Minister, and we've got it here? How did we get this?
The Chairman: Not whited out.
Senator Tkachuk: There is a little section whited out.
Senator Kirby: The advice which - I assume that's what it is. I don't know. What does "s.23" mean?
Mr. Nelligan: Section 23 is solicitor-client.
Senator Tkachuk: How has any correspondence to the Prime Minister come to us?
Mr Nelligan: I don't think there has ever been any suggestion that the Prime Minister comes out. It is advice to the Prime Minister. This appears to be an update. This is a factual report which was simply sent to him to brief him on the current situation. And I think it was on that basis that it would have been released in its relatively full form.
Senator Jessiman: Are there any memoranda to the Prime Minister in October or November of '93?
Mr. Nelligan: If there are, I haven't seen them yet.
Senator Tkachuk: Are you saying that we could get memorandums that are advice to ministers and Prime Ministers?
Mr. Nelligan: I didn't say advice. This is not advice.
Senator Tkachuk: No, no, memorandums - who decides?
Mr. Nelligan: Well, these are these little gnomes over in Justice that make those decisions.
Senator Jessiman: If a document like this can come - you know, this was cancelled later. There has got to be something surely in writing. The Prime Minister was involved. We were told by one of the witnesses that he personally gave the Nixon report to Mr. Desmarais. But surely there must be something in respect - between the Prime Minister and probably Nixon.
The Chairman: Mr. Stehelin, be that as it may, the committee will still - there is still a great number of questions to be asked. Would it be asking of you too much to appear - this is what we call a short day. We usually adjourn at 11:30 and meet again at 12:30, and then we adjourn at 3:00. Would it be possible for you to come back this afternoon?
Mr. Stehelin: Certainly.
The Chairman: All right. That's fine. So we can judge ourselves accordingly.
Senator Tkachuk: I just want to follow this up a little bit here. Are they examining the documents to the Prime Minister up to the point of the Nixon report? Are they also examining documents to see whether they could be sent to us, whether they contained advice or whether they contained information to the present Prime Minister?
Mr. Nelligan: I'm not aware of whether they have included that in their research.
Senator Tkachuk: Could we ask them?
Mr. Nelligan: I will be meeting with them this afternoon and I will ask them.
Senator Tkachuk: And what about Minister Young?
Mr. Nelligan: I do know that the Desmarais - rather the Rowat report that we referred to yesterday, I think dated November 4, was a briefing of Minister Young. I don't know of any other briefings. It was, in a sense, a factual report given to him to bring him up to speed.
Senator Tkachuk: Okay.
The Chairman: All right, where were we?
Senator Kirby: I am finished, Mr. Chairman.
The Chairman: All right. Senator Gigantès?
Senator Gigantès: Mr. Stehelin, you are a very impressive witness, and I thank you for it.
Mr. Stehelin: Thank you.
Senator Gigantès: Not only do you obviously know what you're talking about, but you manage to make it clear which is not the case with everybody on this planet. I am very grateful.
Throughout your meetings with the various proponents, Paxport, Claridge, Mergeco, were any lobbyists in attendance at any of these meetings?
Mr. Stehelin: Not that I would recognize. Principally, it was the people - Spencer and people from Claridge that I dealt with.
Senator Gigantès: Okay. Were you ever contacted by any lobbyists in relation to this matter?
Mr. Stehelin: No. They would know better than to contact me.
Senator Gigantès: You didn't lift any stones to see if they were lurking under?
Mr. Stehelin: No.
Senator Gigantès: Thank you. I would like to ask a quick question about something in a memo to file from you dated February 9, 1993, on the subject of conversation with J. C. Wilson, of February 2, 1993. The document number - maybe you'd like to take a note and give it to Mr. Lynch-Staunton who's very worried about document numbers - and Senator Tkachuk.
The document number in question is 00120(J). According to the memo, Mr. Wilson was hired by Hession to head up a transfer team re Paxport proposal. May I read to you part of the third paragraph? It says:
Jim Loutts from Ernst -
Presumably Ernst & Young?
Mr. Stehelin: Ernst & Young, yes.
Senator Gigantès:
...was involved in the considerations around the financial model and various other matters concerned with financing. The model was done by a French -
That's all it says.
- firm and Wilson could not remember the name of the company, however, he did point out that most of the consultants involved in the program were working on "spec" except for their out-of-pocket fees.
What did you understand this to mean, most of the consultants were working on spec?
Mr. Stehelin: Up to the original submission of the proposal - whenever that was, in '92, I guess it would have been - a number of consultants were not drawing fees because there was no certainty that they were ever going to enter into negotiations. And they were being paid their out-of-pocket expenses only.
Senator Gigantès: Did you ever learn what arrangements these consultants had with Paxport?
Mr. Stehelin: No, I never pursued it.
Senator Gigantès: And what sort of consultants are we speaking about here?
Mr. Stehelin: Well, you had engineering firms, architects, airport management people, presumably tax people, you know, various people trying to put the package together or the original proposal.
Senator Gigantès: Would you know if lobbyists were included in this group?
Mr. Stehelin: I wouldn't know.
Senator Gigantès: Well, may I go further back? I'd like to talk to you - or have you talk to me, in response to some questions about the history of how you got involved again. The documents show that you were brought into the process early. You already responded to that, December 16, 1992. There was a meeting then with Peter Strum. Was that a person of your firm?
Mr. Stehelin: He is one of my partners, yes.
Senator Gigantès: Barbeau, Farquhar, Cloutier and Jolliffe, document 00133, marked A.
The notes from the meeting show that there was discussion of the following:
There have been major changes in the...financial institutions are viewing risk, particularly during the past 6 months or since the issue of the RFP.
These changes recognise the airline industry problems which, together with [Olympia & York] real estate empire restructuring -
That's a nice word.
- have led to policy changes in the financial institutions. They are standing back from "bricks and mortar" -
As you told us, real estate is a terrible investment. I can't sell my house to anyone.
- having perhaps too much exposure to risk.
There is also concern around the question of how much the travelling public can continue to be expected to pay, over and above the direct cost of airfares.
And later on, paragraph 7:
All of these conditions could lead to the government being asked by PAXPORT, or more likely its financiers to provide guarantees of one sort or another, thus Transport Canada should concern itself with the question, "Does the deal have a future, does it make good economic sense, will it work?"
The government's cash flow should not be given up without something of equal or better value in return.
Could you discuss these issues?
Mr. Stehelin: Sure. I don't know whose minutes these are, but I remember the meeting. Clearly, by December of 1993, the financial institutions had written off more in commercial loans than they had ever made in the history of the banks. Royal Bank had booked $2 billion in loan-loss provisions. Royal Trust was in deep trouble and I spent four months there. The real estate market was a shambles.
It wasn't only Olympia & York. It was Bramalea. It was Cadillac. It was everybody.
It was the first time that the real estate market and the first recession - I don't call them recessions, that was a depression - had really hit the Metro Toronto marketplace.
The banks were under a lot of pressure from their shareholders, from their boards, to explain why they had got into such trouble in real estate.
They were looking at limiting their book of real estate. In other words, it would not matter how good the deal was, they would not go near it because their book was, quote, full.
You had Canadian Airlines that was in deep trouble. The airline industries around the world had lost more money in two years than they had ever made in their history.
You had a number of financial institutions that were in trouble, and the signs were starting to show in a number of insurance companies, major players.
So the whole marketplace had changed, and it changed in about 18 months, from '91 through '93.
And the aviation industry was a mess. I mean, it was a mess. Prices were low. There was too much capacity. Air Canada and Canadian weren't prepared to deal with the capacity issue.
And those were the things that, having been personally involved in O & Y and in Royal Trust and in Canadian and all of those files -
Senator Gigantès: And the CBC building in Toronto?
Mr. Stehelin: I didn't get personally involved in that one. But it was clear that the market was not the same as it had been six months ago. And that's really what we expressed at that meeting.
Senator Gigantès: And you agree with the statement that the government's cash flows would not be given up without something of full or better value in return?
Mr. Stehelin: As a taxpayer, I always agree we should not give something away unless we get something more in return.
Senator Gigantès: The sentiment does you honour, sir.
In the March 2, 1993 report, you say that you had to prove or disprove that the $850 million proposal could be financed; had to show that Paxport shareholders could come up with the $66.5 million in equity. You told us that earlier. How long did you spend collecting information and preparing this report?
Mr. Stehelin: I cannot tell you in actual time. I think we really started the process of gathering the information after the Wood Gundy presentation, and I can't remember the date of that, but I believe it was early February.
Senator Gigantès: About six weeks then would be a -
Mr. Stehelin: That's probably as good a time frame as any, yes.
Senator Gigantès: With whom did you meet or speak to collect your information? Representatives of Paxport? Their own financial advisors? Parties suggested to your firm by Paxport?
Mr. Stehelin: No. We originally met with Wood Gundy and we met with them on several occasions. Initially, it was contemplated that Wood Gundy would get us what we needed. Okay?
We then got some of it from Wood Gundy. We went directly to the proponents involved and asked them for financial statements and financial information and corroboration from banks, you know, any way we could get a sense of where they were and what they looked like and how much credit they had available, et cetera.
Senator Gigantès: So you are satisfied that Paxport had the opportunity - had the opportunity to provide you with all the information that was necessary?
Mr. Stehelin: Yes.
Senator Gigantès: I'd like to begin at page 3, financeability of the total project. Could you please read those two paragraphs for the record, one that starts. "When the initial Request for Proposal was issued..."?
Senator Jessiman: Which document is this?
Senator Gigantès: The document is 00190.
Senator Hervieux-Payette: The first report from Deloitte & Touche.
Senator Gigantès: And it's "Financeability of the Total Project: When the initial Request for Proposal was issued...".
Would you read those two paragraphs for the record?
Mr. Stehelin:
When the initial Request for Proposal was issued and responses received, the expectation was that PAXPORT would be able to finance the total project outright. In our view, PAXPORT cannot finance the entire project at this time.
This fact is inherently acknowledged in that their proposed approach is to finance the project on a "finance as you go" basis through staged redevelopment.
Senator Gigantès: Could you explain to somebody who is not very strong on financial stuff - because I have no finances to manage, I've never learned. Can you explain what you mean by, "...the expectation was that Paxport would be able to finance the total project outright..."?
Mr. Stehelin: I think the original concept was that somebody will be able to prove that they have $850 million to do this project.
And, in the real world, nobody was going to be able to prove that. I mean, Claridge, if they wanted to, could write a cheque for $850 million. They've already proved that, in subsequent events.
But nobody was going, at that point in time - the expectation to say somebody can write a cheque for $850 million for this deal was not realistic.
Senator Gigantès: Whose expectation was it that somebody was going to write such a cheque?
Mr. Stehelin: I think it was just - I mean, I'm just guessing, because I wasn't involved in the RFP process. I'm just - having seen other transactions and having seen the Crown deal in other situations, there sometimes is this simplistic approach that says: Well, we've got to make sure they can write a cheque.
And the difficulty is that, in most transactions, it's not the proponent's cheque in its entirety; it's a commercial transaction. And I don't think - it was just: We have to make sure that they don't default on the deal.
So the easiest way to do that is to make sure they can write a cheque. I think one just logically followed the other.
Senator Gigantès: So, really, the realistic way, as you said earlier, was that they were going to go the route to finance as you go.
Mr. Stehelin: Yes. That was the only conclusion you could come to, in my mind.
Senator Gigantès: The project, of course, was for the redevelopment of T1 and T2, and we have been told by several witnesses that this was urgently needed. Other people disagreed with urgency. That's a separate matter.
Proposal called for redevelopment of $850 million which, if I understand correctly, would take place in stages.
Am I correct?
Mr. Stehelin: Yes.
Senator Gigantès: Then "finance as you go" approach would mean that, if the financing was not forthcoming at any point, the redevelopment would not go forward.
Is that right?
Mr. Stehelin: Yes.
Senator Gigantès: So that, in fact, the proposal would not have insured that $850 million would be invested in redeveloping Pearson. There was no guarantee that this would necessarily happen?
Mr. Stehelin: The guarantee was that, if the traffic levels went up, and the demand was there, the transaction was financeable.
Senator Gigantès: Okay.
Mr. Stehelin: Nobody wanted to build another Mirabel.
Senator Jessiman: Including Claridge.
Mr. Stehelin: Especially Claridge.
Senator Gigantès: But as structured, the redevelopment could have stopped at any point?
Mr. Stehelin: If the demand was not there.
Senator Gigantès: They could have stopped it.
Mr. Stehelin: Yes. Except the first stage was not optional. That had to be done. And that was dealing with the problems around Gate 80 and the transborder and Terminal 1.
Senator Gigantès: "Wood Gundy also have offered the view", I think you have here, "with which we concur" - I am citing from your report -
...that the availability of future funds for later stages will be dependent upon the performance of PAXPORT during the initial stage. And it is difficult, if not impossible, at this point...
This is still from your document.
...to obtain satisfactory comfort and evidence concerning the commitment of various lenders to purchase future debt and the ability of PAXPORT to raise additional equity.
The next sentence:
This is to be expected at this point in time.
Does this refer to the conditions of the market or -
Mr. Stehelin: Well, I think nobody at this point in time knew what the ultimate transaction would look like.
One thing it is very difficult to do is get a commitment from somebody to give to you or lend to you a lot of money when he doesn't know what the transaction is. So that was one issue.
I think there were - you know, if you went and sat with a life company or a major financial institution, which Wood Gundy had done, based on what, simplistically, everybody believed the transaction would be, it looked like a reasonable transaction from a lending point of view.
But if you don't know what the environmental issues are, and if you don't know what the guarantees are, or what the performance criteria are, or all those things that ended up in the final transaction, you are not going to get somebody to commit 100 per cent. All you're going to get is an expression of interest.
Senator Gigantès: Okay. Now, on page 4 of your memorandum, there is a category that starts: Paxport issues. And you say:
In our view, until the following issues are resolved, the ability to finance the proposal cannot be reasonably assumed:
We have been advised that one of the participants (Ellis-Don) will not continue as a member of the consortium and accordingly, there is approximately an $8 million or roughly a 13% shortfall in the equity contribution.
The next is $5 million of Allders $15 equity - 15 million equity, I presume. Is that $15 million?
Mr. Stehelin: Yes.
Senator Gigantès: Because the word "million" is missing.
...is contingent upon their receiving "the required regulatory approvals necessary for the duty free sale of liquor by Allders and notice of termination (not longer than 90 days) of the LCBO lease".
Can you please explain the Ellis-Don situation?
Mr. Stehelin: Ellis-Don simply stated that they may not participate and they may not be at the table for $8 million.
Senator Gigantès: So how much money did that force Paxport to find?
Mr. Stehelin: Eight million dollars.
Senator Gigantès: I'd like to turn briefly to a memorandum of February 11, 1993, to Paxport File, conversations with Donald J. Matthews of Matthews Group Limited ("MGL"), February 11, 1993, at approximately 10:20. The document is 00188, also marked C.
Could you please read it out? It's quite brief.
Mr. Stehelin: I don't have it.
Senator Gigantès: I will read it for you:
I phoned Mr. Mathews [sic] to discuss the letter which was forwarded to by [sic] Wood Gundy dated February 9, 1993. I asked Mr. Mathews whether he had a copy of the letter or perhaps we could discuss it briefly, particularly my questions with respect to paragraph three (3).
He indicated that he did not have the letter in front of him and I stated that the issue I was trying to deal with was the paragraph which indicated "MGL has made separate arrangements with one of its affiliated companies to fund $20 million that is to be invested on the turnover date".
If a witness - could you explain this?
Mr. Stehelin: It wasn't satisfactory evidence to me that he had $20 million.
Senator Gigantès:
Mr. Mathews' answer was that they had arranged the money and that's what the letter said, so there shouldn't be any problem...
This is still from that memo of yours. "I indicated...", you indicated:
...that we were being asked to give an opinion on the availability of these funds to Paxport at the turnover date via the Mathews Group. I stated -
That's you still.
- that he should assume that we were acting in an audit capacity and therefore it was important that we be satisfied that these funds were in fact, available.
Mr. Matthews asked whether I was indicating that he wasn't telling the truth...
And you replied:
..."No, it wasn't a question of truth or not, it was just a question of satisfactory independent evidence with respect to the availability of the $20 million".
Sir, you have wonderful tact. "After a very brief discussion", you go on:
...I said, for example, "if the Royal Bank, which had indicated that you operate an eight digit operating line, were to indicate $20 million was available upon suitable terms being met, i.e. agreement to your proposal with the government re: Terminal 1 and 2, this would be ideal". There was no response. He took my name and telephone number and indicated that someone would get back to me.
So in that conversation, Mr. Matthews appears, from what you are saying, reluctant to tell you where the money was going to come from.
The next day, February 12, you attended a meeting with Transport Canada officials where you discussed the status of your financeability inquiries. And I draw your attention to document 00738(D), a memorandum of minutes of that meeting.
Under item 4, you apparently reported, and I quote:
...there is no evidence to support the availability of the Matthews Group Limited (MGL) proposed $20M equity investment. Don Matthews was not cooperative on this subject. Wood Gundy has not seen a current financial statement for MGL. The financial statements submitted with the Paxport proposal are at least 18 months old and MGL's situation may have been affected by changes in real estate values.
I end this quotation.
A further quotation with respect to Wood Gundy's involvement, you noted:
...a review of Wood Gundy's description of the process leading to financing of the Project; it was explained that a further commitment from the institutional lenders at this time is unlikely.
Then you continue:
...Wood Gundy appears to be reluctant to become directly involved in the financeability issue.
And further:
...several of the equity investors would not have the financial depth to rescue the project if problems developed.
And the memorandum continues:
Deloitte & Touche will write again to Wood Gundy and the equity partners seeking further evidence of the ability of the $61 million equity investment, e.g., certain investors to identify source of funds, and to obtain current financial statements for MGL; Wood Gundy to be requested to also provide an assessment of the effect of Paxport/T3LP merger.
Also note the following paragraph under item 6, page 4, on proposal issues:
W. Power noted that Paxport appears to be trying to circumvent the [following] structure -
Senator Jessiman: Formal structure.
Senator Gigantès: The formal structure.
...in addition to their lawyers' request for a meeting, Paxport's representatives have been contacting senior airport management officials in an attempt to deal with some of these issues.
The next document - have you any objections to any of this? Does it meet your recollection?
Mr. Stehelin: The issues - I mean, the issues that deal with us, yes. I mean, I can't recall the meeting specifically, but certainly the issues that we talked about, that's where we were.
Senator Gigantès: Thank you. The next document I'd like to refer to you is a letter from you to Victor Barbeau, dated February 22, 1993, document 00196(E).
On page 2, you set out a summary of the equity commitments of the various Paxport participants. Could you please briefly take us through the chart?
Mr. Stehelin: What would you like, sorry?
Senator Gigantès: Could you take us through the chart? I have this chart, "Summary of Equity Participation...".
Mr. Stehelin: Page 2?
Senator Gigantès: Yes.
Mr. Stehelin: Basically, all we were trying to do is summarize where everybody was and who had put what money in, okay? And the commitments that were on the table at that point were the $23,950,000 from Matthews; Allders, ten and five that we've talked about before; Bracknell Corporation's eight-six, and CIBC/Wood Gundy for ten. We didn't know where Ellis-Don was at that point.
Senator Gigantès: That's the $8 million that's missing.
Mr. Stehelin: Presently unknown. What you - the original number everybody was working to here was $66 million.
Senator Gigantès: And, according to this table, even when you consider only the commitments, $8 million is missing from that 66.5. Is that the Ellis-Don withdrawal?
Mr. Stehelin: That's the Ellis-Don issue. Nobody knew where Ellis-Don was at that point.
Senator Gigantès: So, at that date, in effect, the only money Paxport had received was $4.4 million?
Mr. Stehelin: That's all that had been advanced to date.
Senator Gigantès: In the notes of your initial December 15, 1992 meeting with Transport Canada on this - that's A - there was a note, that:
Have up to February 15, 1993 to prove financeability...It is suggested that work could start April 30, 1993. How realistic is this?
Page 2, item 7.
Mr. Stehelin: I think the February 15 date was being driven by a letter that had gone out to Paxport in December, I believe, which basically said, in a value, if my memory is - basically said: In evaluating the proposals we got, yours looks like it's the best. We've got to deal with a bunch of issues; there's a whole bunch of things we don't agree with.
And the financeability issue, I think the deadline was February 15. That was an imposed deadline, at that point, to try to deal with a number of these issues.
Senator Gigantès: Thank you. I'd like to turn to the Matthews Group's ability to contribute its $20 million required, because they had to contribute that under this commitment. On page 3 of the letter under Matthews Group Consolidated, you said:
On February 19, 1993, we received a Consolidated Financial Report together with supporting schedules and financial information concerning the Mathews [sic] Group Limited as at November 30, 1993.
That's 1992, it should be, presumably.
As will be discussed below, the Matthews Group's $20 million contribution to the equity of "Paxport" at "The Turnover Date" will be funded by Allders International Canada Limited...Based on the financial information provided at November 30, 1992, we are unable to determine whether Mathews Group would be in a position to fund the $20 million were it not for its Heads of Agreement with Allders International Canada.
So on its own, Matthews could not provide the money it had committed to provide. From this paragraph, I gather it was, quote, saved, unquote, by these heads of agreement with Allders International Canada.
First, when you asked Mr. Matthews about the $20 million on February 11, he said he was getting it from one of his affiliated companies. Is Allders a Matthews Group company, to your knowledge?
Mr. Stehelin: I am having a little bit of trouble following you.
Are you asking questions and adding things to my letter as you go through?
Senator Gigantès: No, I am not. I am quoting.
Mr. Stehelin: Then let's go back. You are implying assumptions in my letter that are not in the letter. That's one. Two, the letter speaks for itself.
Senator Gigantès: The letter speaks for itself.
Mr. Stehelin: Let's stick to the letter.
Senator Gigantès: Okay. So the $20 million, in your opinion, was this $20 million that Matthews was going to find, was it going to come from Allders?
Mr. Stehelin: In my opinion? It is a fact. There's an agreement that states how Matthews is going to fund this $20 million. It is not my opinion. It is a fact.
Senator Gigantès: From Allders, okay. I'm glad you said that. Allders, as I understand it, had the duty-free concession at Terminal 3, is that correct?
Mr. Stehelin: Yes.
Senator Gigantès: Did it, at that time, have the duty-free concessions at Terminals 1 or 2?
Mr. Stehelin: I can't recall. I'm going to assume it didn't because one of the issues here was the LCBO issue. It was a provincial jurisdiction issue that was tied into this that the federal government really couldn't deal with at that point. Because one of the conditions that Allders had attached into the overall structure was that they basically got the right to sell the liquor, the duty-free. And I don't think they had it at that point. And that wasn't something that, necessarily, Transport could deal with. So that was, you know, that was an issue. That's why I said I don't think they did at that point in time.
Senator Gigantès: Okay. But Allders International Canada Limited is owned 51 per cent by AGRA Industries?
Mr. Stehelin: Yes.
Senator Gigantès: A publicly traded company and 49 per cent owned by Allders PLC, a U.K. publicly traded company?
Mr. Stehelin: Yes.
Senator Gigantès: Now, the request for proposal was limited to developers who were Canadian and controlled, in fact, by Canadians. Indeed, this was a restriction that we have heard was hard fought for by Mr. Hession to exclude British Airports Authority. I'm not quoting now.
Senator Tkachuk: What are you are implying? It is a Canadian company. What are you saying? It is American or British or what? It is controlled, its controlling interest is Canadian, 51 per cent. We've heard that before.
Senator Gigantès: We are approaching the end, are we?
The Chairman: I have two minutes, and I want to make an announcement before we break.
Senator Gigantès: Do you want to make the announcement now, and then I will make one 30-second -
The Chairman: Make the 30-second now and I will -
Senator Tkachuk: Can you quote, Senator Gigantès, and if you are making your own statement, say, I'm going to my own statement, because you just kind of run it all -
Senator Gigantès: I am now making my own statement. From what we have heard so far -
Senator Tkachuk: Thanks.
Senator Gigantès: From what we have heard so far, it seems, at this particular stage of the chronology we have come, Paxport, whatever you would like to call it, was a very strange choice to proclaim as the winner of the competition.
Thank you, Mr. Chairman.
Senator LeBreton: That's your opinion.
Senator Gigantès: I said it was my opinion.
The Chairman: Order. Order.
Mr. Stehelin, you are a very, very valuable witness to us, and we are delighted you're going to come back this afternoon.
Mr. Stehelin: What time would you like me to come back?
The Chairman: At 12:30.
Mr. Nelligan: We break at 3:00, so you can plan the rest of the day.
The Chairman: I just wanted to ask you, just to set the stage for this afternoon: You wrote two reports, for all practical purposes. You've wrote one on March 2 to Mrs. Labelle, and I assume that these documents that you gave us were accompanying this report, letter so-called. And this deals with Paxport and its financeability.
Practically all of the questioning this morning has dealt with Paxport, but we are dealing with a thing called the Pearson Development Corporation which is the marriage of Paxport and Bronfman/Claridge.
And your second report is dated August 17, and it is directed to Mr. Rowat, in which then you apply yourself to the marriage.
Did you also say that you were aware or you saw the agreement between Claridge and Matthews? I keep - you saw the agreement?
Mr. Stehelin: The January 14th agreement between the two parties?
The Chairman: Yes.
Mr. Stehelin: The letter of intent, yes.
The Chairman: The letter of intent to enter into the partnership was dated the 15th of January.
Mr. Stehelin: Yes.
The Chairman: Did you see the agreement before the letter of intent went out?
Mr. Stehelin: No. The first document I saw, I believe, was that letter of intent.
The Chairman: I see. I thought you said you saw the agreements.
Mr. Stehelin: I saw the final agreements that they - the final partnership agreements.
The Chairman: Could I ask the committee, since we are dealing with the Pearson Development Corporation, which was the organization which had come together and then was cancelled, it's really our main focus. That's what we want to get into.
And your final report to deal with this merged entity is dated, as I said, August 17th.
Can we zero in on this stuff this afternoon?
Senator Gigantès: Mr. Chairman, I have an objection to that, if I may.
The Chairman: Go ahead.
Senator Gigantès: My objection is this. This is a public contract. The proceedings were dealing with the transfer of public property to a private company.
The quality of the process at all stages is an important issue. And so that my colleagues opposite do not get too frantic about this, from the evidence I have seen, it is my opinion that to proclaim Paxport the winner of the composition and Claridge not the winner was an improper act, in my view. Therefore, what evidence we have been given on the first report, which is the March 2 report by Mr. Stehelin, is pertinent to what I have just said.
The Chairman: No one is suggesting it is not pertinent. I am suggesting that the reason Mr. Stehelin has agreed to come back is to deal with the final stage. There is more than one stage, and you've made some very good points.
Senator Gigantès: Mr. Chairman, it is quite right that he should deal with the final stage, but, as I read the evidence, the public servants, urged by their political masters, gave the competition to Paxport. And then -
Senator Jessiman: That's not true.
Senator Tkachuk: Where in the evidence?
Senator Gigantès: As I read the evidence. I am speaking for myself.
The Chairman: I'm not going to get into this. There is no evidence to that effect. Adjourned until 12:30.
Senator Kirby: Can I comment?
The Chairman: Yeah.
Senator Kirby: I just want to be clear. First of all, Senator Tkachuk's questions were on the August 17th document; most of mine were, too. But you're suggesting - I'm only bothered by the suggestion that, in some sense, you're going to start controlling what documents people may ask questions on. I could read that into - I understand why you said what you said. But you seem to be implying that people should not ask questions on, for example - I didn't have any more questions anyway, but you seem to be implying -
The Chairman: I have not, as long as this committee has been going on and I have been chairman, I have not muzzled anybody. I am suggesting, for the benefit at least of the press or the media or people who are watching this, we should now get to something which is very important, which is Mr. Stehelin's views with respect to the final merged result, which is really what we are here for.
Senator Kirby: I thought, in fairness to Senator Tkachuk and myself, that we had discussed that -
That you and I had met that test. But maybe we didn't.
The committee adjourned to 12:30 p.m.
Ottawa, Thursday, August 17, 1995
The Special Senate Committee on the Pearson Airport Agreements met this day, at 12:30 p.m., to examine and report upon all matters concerning the policies and negotiations leading up to, and including, the agreements respecting the redevelopment and operation of Terminals 1 and 2 at Lester B. Pearson International Airport and the circumstances relating to the cancellation thereof.
Senator Finlay MacDonald (Chairman) in the Chair.
The Chairman: All right colleagues, come to order please. Thank you again, Mr. Stehelin. Clarifying question from Mr. Nelligan.
Mr. John Nelligan, Q.C., Counsel to the Committee: Mr. Stehelin, this morning in answer to a question as to whether you had read the Nixon report, you said that you had read both reports. Subsequently, you indicated that you had not read the Crosbie report. Would you explain please what you meant by having read both reports?
Mr. Paul Stehelin, Deloitte & Touche: I read two reports by Mr. Nixon.
Mr. Nelligan: All right. There is one report which is at Tab O of our senior binder which is the public report. I wondered if someone could show it to the witness.
Senator Gigantès: That is .18 type.
Mr. Nelligan: It is indeed. Do you find it at Tab O, sir?
Mr. Stehelin: Yes.
Mr. Nelligan: Is that one of the reports that you read?
Mr. Stehelin: This is the one that I have, yes, I assume without reading the whole thing.
Mr. Nelligan: Have you had another opportunity to see another Nixon Report?
Mr. Stehelin: Yes, I have read another report.
Mr. Nelligan: In what way does it differ from the one you have in front of you now?
Mr. Stehelin: Some of its conclusions are different.
Mr. Nelligan: Are you aware of the date of that other report?
Mr. Stehelin: I do not have a copy of it. I cannot recall.
Mr. Nelligan: Do you know whether it is before or after the one dated November 29th?
Mr. Stehelin: Off the top I can't tell you. I didn't pay attention to the particular dates.
Mr. Nelligan: Is it in the same format?
Mr. Stehelin: Basically, yes.
Mr. Nelligan: Thank you. Those are all my questions.
Senator Jessiman: Mr. Chairman, shouldn't we ask Justice? Is that not something that would be important to us? We are going into things this morning about things that really have nothing to do with what we are here to decide, and I would like counsel to inquire to see whether or not this committee is entitled to that report.
Mr. Nelligan: I am meeting with them this afternoon.
The Chairman: All right. Now we have decided, because of the tremendous inconvenience to which we have put Mr. Sinclair of ATAC and which we summarily - I summarily cancelled this afternoon, Mr. Sinclair will be here and we will hear him this afternoon, maybe not to extended time, depending on how we get along with Mr. Stehelin, but we will try to fit Mr. Sinclair in. Senator Tkachuk?
Senator Tkachuk: Hello, sir. Just to continue on fromthis morning, I want to move on to the document of August 17th, 1993, 002081 which I had made some reference to this morning, but I want to go through it in some detail this afternoon because it relates closer to the closure of the deal and all the players are in place.
Senator Jessiman: It is the letter from Deloitte Touche.
Senator Tkachuk: It is the letter from Deloitte Touche to Transport Canada, attention Mr. William Rowat. Have you got that letter with you, sir?
Mr. Stehelin: Yes.
Senator Tkachuk: You start with the transaction is presented on the 23rd of August - financial projections of Mergeco is financable. And why don't we just go through the conditions - or I shouldn't say conditions - general assumptions that you make and comments. I think we can pass over one which is the equity to debt positions. And let's make it like a checklist to see what got done. I will make some premises because we have heard testimony previously. You can just sort of agree with me or not.
Number two, the Air Canada matter. That got completed?
Mr. Stehelin: Yes. There was a letter of understanding on the terms of the new lease.
Senator Tkachuk: Okay. And all it required from you here was the Air Canada board approval from the Air Canada board, and that got done as well as, you know, by the time the agreement was signed and completed by October?
Mr. Stehelin: I do not know that for sure, but I assume.
Senator Tkachuk: Maybe I will not ask that then. As far as I know it got done. The cash injection of $61 million?
Mr. Stehelin: That happened, as far as I know.
Senator Tkachuk: We will not know about number four, which is the construction phase -
Senator Jessiman: Could I just ask a question on that, Senator Tkachuk?
Senator Tkachuk: Sure.
Senator Jessiman: The first phase though required $61 million of equity?
Mr. Stehelin: What was basically going to happen is they would put in their equity and start down and then borrow, get bridge financing.
Senator Tkachuk: All the partners put in their cash?
Mr. Stehelin: The $61 million was put in, yes.
Senator Jessiman: And T1, which was the one that Transport Canada were interested in having developed, and Pearson, or the Pearson Corporation was not as anxious. That was going to - there was a commitment by Pearson to put up $15 million to do that job, as I understand it.
Mr. Stehelin: What they had to do was immediate remedial repairs and work to T1, and that was part of the transaction that was to be done.
Senator Jessiman: We were told yesterday, whether you know this or not but I am going to tell you because this is the evidence that was given, if the government estimated the work would be $11 million, Pearson was responsible for $15 million. The government did not think, so there was a $4 million cushion, and any excess over $15 million, the government paid a third. Did you know of that?
Mr. Stehelin: That sounds familiar. I cannot remember where it is in the agreements.
Senator Jessiman: Thanks very much. I just wanted to clarify that.
Senator Tkachuk: Number five was the provision of the $5 million fund which was in negotiation which was a set aside to ensure equity for stage two.
Mr. Stehelin: Yes.
Senator Tkachuk: That was done?
Mr. Stehelin: It would have been done.
Senator Jessiman: There was an agreement?
Mr. Stehelin: There was an agreement. It is part of the overall agreement.
Senator Jessiman: Pearson was obligated to put up to that money?
Mr. Stehelin: Yes.
Senator Tkachuk: If we go to six, we are talking about dividends and interest payments which is future, but there is a question of the $38 million short fall, cash short fall between - or potential cash short fall between year four and eight. Is that part of the anticipated cash short fall where you talk about the first 10 years not actually making any money or net profits?
Mr. Stehelin: No, the cash and the profit were two different things. As I said before, what you had was you had a period, I think it was years three through five roughly, where in fact T1 and T2 were not generating positive cash flow. Really, it was a combination of the switchover to the new Air Canada lease. It was a combination of capitalizing certain expenses that then you had to go out and borrow money on because once one phase was finished, they stopped capitalizing and expending. But there was that period where the cash was tight on 1 and 2.
Senator Tkachuk: Excuse me. I sometimes have difficulty hearing so I am just going to put on this earphone here. It is a sign of being 50, I think.
Senator Jessiman: I know how you feel.
Senator Gigantès: I am 72.
Senator Tkachuk: You are a lucky man. Notice when you are speaking I take this off, senator.
Senator Gigantès: When you are speaking I do this in preparation for falling asleep.
Senator Tkachuk: You have done that.
The Chairman: Don't deny yourself a natural advantage.
Senator Tkachuk: If we go to number seven - now it is too loud, right - if we go to number seven,
...will be viewed favourably by lenders and facilitate the ability to finance the transaction. Assuming performance is generally in line with the projection, we feel the involvement of Claridge is a very positive in terms of financability.
I think that is self-explanatory.
Number eight and nine - in number nine again I think it is self-explanatory, "accepts assuming this is done to the satisfaction of Claridge who will be arranging the financing". Is that because Claridge is now the major partner?
Mr. Stehelin: The issue that is being referred to there is that the position of the proponent was that he wanted, in the land lease, the ground lease itself, exactly the same default provisions that were in the T3 financing package.
The benchmark that was originally used by the government or Transport was the LAA ground leases which had been executed for Vancouver and various other centres, and the position was that because, I think basically what everyone was saying, was because you were probably going to go to the same lenders as who were on T3, it just made so much sense to go to the same people who knew how to do this, that the terms and conditions with respect to default and the remedies and what the lender could do and couldn't do should be identical to the Terminal 3 conditions.
There were some changes or some things that the government was not prepared to agree to on an identical basis, and that became an issue because simply saying - why would the lenders take a less favourable default provision or remedy provisions than they already know exist at Terminal 3? That was what the issue was all about.
Senator Tkachuk: We get to item 10, which is the $33 million passenger diversion clause and the inclusion of potential use of area which will add comfort to the lenders concerned with respect to the catastrophic conversion issue. Just to clarify here, because we have heard evidence to this, at any one time the government could divert up to 1.5 million customers, is that according to the agreement?
Mr. Stehelin: I can't remember the specific clause, but your 1.5 sounds right, yes.
Senator Tkachuk: And lenders would require some diversion protection from the tenant. Is that why this was so important, both to -
Mr. Stehelin: I think what you are - I would not focus on the 1.5 million to start with.
Senator Tkachuk: I am not focusing.
Mr. Stehelin: The real issue was - and this was in my mind anyway - I can understand if I were a lender what their concern would be just as I could understand what the government's concern was.
It was really trying to cover the disaster, and the disaster that is alluded to in here from Pearson's point of view is 11 years into this transaction the Government of Canada decides it still owns all the land in Pickering, never sold it. It still owns it all. What if it decides to build Pickering, and all of a sudden you have two large, international terminals and the traffic at Pearson goes down to 22 million and you have just finished putting up $800 million? That was the crux of the difference and the issue that everyone was dealing with.
It wasn't a question of whether it should be $33 or $29 or $35 million or any other number. It was, what if they build Pickering and pull 10 million passengers out of here in 10 years?
Senator Tkachuk: So, in other words, all the tenant was concerned about was that the landlord, knowing that he was getting all this rent for the three terminals, would not go into competition with itself?
Mr. Stehelin: I mean, it leads you into a whole bunch of other issues because the government's position was, we must maintain flexibility in terms of what happens in greater metro southwestern Ontario, et cetera, et cetera.
I think the other factor that entered into it or that everyone tried to deal with was that it was acknowledged that there was the ability to expand, once you had Terminal 1, 2 and 3 on what was called the area 4 lands, and that was not part of the original RFP. But if you ran out of capacity - and there is a big dispute whether you were going to run out at 30 or 35. Put two experts in the room and you get two different opinions, but it was somewhere between 30 and 35. The ability to control the development of 4, those lands, that was never put on the table during the negotiations, okay?
The proponent, they wanted that, because it gave them flexibility. The logical cost thing to do would be to go to area 4 if you hit 33 million people. You then had the whole infield, what they referred to as the infield, which is the area between the - I guess it is the north/south runways or whatever it is.
This 33 million became a huge issue because one, don't want you building Pickering. The government's position was why would we do that? We get rent from you. Our rent goes up as you make more money, et cetera, et cetera, and we have area 4 and we have the infield and it is more cost effective to develop where we are than go out to Pickering. That is what it was all about.
It was a financing issue in our view because the banks and the lending institutions, okay, when they looked at this deal were going to say what if the government opens Pickering? So we could understand why it was an issue from their point of view. And that is - it was dealt with in the agreement in probably the fairest and best way it could be.
Senator Tkachuk: You draw your conclusion, and I am just going to - when we distribute these things, that does not mean that they are in the record, sir, so I will read it. You say,
We feel comfortable that the transaction is financable. However, we would caution that in the end result the willingness of lenders to commit to long term funding for later phases will be dependent on the performance of Mergeco, particularly the initial four years of the project.
Do you have any anything to add to that or should I continue on to the next part of it?
Mr. Stehelin: I can't add very much to that.
Senator Tkachuk: Let's go to the value of the transaction to the Crown, which is fairly complicated, but you refer to the 1992 Price Waterhouse evaluation that was given to the Crown, and I was just wondering if you could explain to the inquiry the differences that you imply here and comparing the two values?
Mr. Stehelin: We tried to compare Price Waterhouse's document which had been done in July of 1992.
The basic conclusion I think is that one - there is four points listed here, but the major differences were obviously the discount rate, and over a period of time half a point makes a big difference. They did not have the same revenue generation going forward. There's was only done using a discounted cash flow in 20 years. And again, the further out you go and all the rest of it.
And they had a very significant negative cash flow in the initial phases of any development which, other than that one blip between year three and four, that $38 million negative number wasn't in the numbers that we were then dealing with as the deal was at that point and as everyone understood it. So there were significant differences in terms of the transaction and how the cash was going to be generated and the income was going to be generated.
Senator Tkachuk: If we go to your conclusions on the value of the transaction to the Crown - and I would like to go to less tangible considerations.
Senator Jessiman: Page?
Senator Tkachuk: Page 5. And I want to go to that because when I was reading this, there is pretty good protection, or what I think is pretty darn good protection, to the Crown, and these things I think should be reiterated, and so I am going to read them sort of one to five and then have you comment after each one. Okay?
I will just start with the first one.
...in the event there is a default in the initial development stages of the redevelopment, it is likely that the Crown would obtain title to Terminal 1, 2 and 3, (i.e. control of the entire airport would revert to the Crown, including Terminal 3). It is difficult to assess in a default scenario what the value of Terminal 3 would be, however, there would be definite advantages to having control of the entire facility.
It is pretty self-explanatory, but do you have any further comments or can you raise a scenario of - could this happen at any time? If they defaulted in stage one, boom, they get it all, the Crown would get it all?
Mr. Stehelin: We are not saying that is what would happen, they would get it all, but the likelihood was probably pretty good. What you had was you had the owners of T3. You were going to have new financing on 1 and 2. They were now part of the same corporate entity, so to speak, and if they got into trouble on T1 and T2, either they fixed it, or they would have all of the lenders on their backs.
The way the transaction was structured, if it went into default, the lenders had to come in and finish whatever phase had started. They had the right to do that or the government had the right to get back title to it.
So, if the thing got into real trouble, the likelihood was if the lenders or you couldn't find somebody to take it over to fix the problems, the likelihood, in my view, would be that the government would get back the whole airport.
Senator Jessiman: May I just ask a question, senator?
Senator Tkachuk: Yes.
Senator Jessiman: The $84 million that was advanced by Claridge in respect of Terminal 3, did they have a first mortgage against the leasehold title?
Mr. Stehelin: No. My recollection of that amount was there was a series of first mortgage bonds against Terminal 3. I think the $84 million was right behind that first series of -
Senator Jessiman: So if they defaulted on this one they would not lose their $84 million? Or do you know?
Mr. Stehelin: It would depend on what the value of Terminal 1, 2 and 3 was at that point.
Senator Jessiman: They were in a second position to some other lenders?
Mr. Stehelin: Yes.
Senator Jessiman: As far as that title is concerned?
Mr. Stehelin: They were in second to the life companies. They are behind the life companies.
Senator Jessiman: Okay. Thank you.
Senator Tkachuk: Number two, of course is that, just so we are clear, the equity investment. There was no government guarantee or anything like that. This was the developers and the tenants own cash being put into this thing, and then again if they defaulted, not only would they lose the airport, they ran the risk of losing the airport, they lose all the money. The government did not have to fork up the money?
Mr. Stehelin: In simplistic terms, what you knew you were going to get was you were going to get $61 million in improvements because that was the amount of cash they were putting in. You would obviously get, if they defaulted - let's just take the first phase. You would get the facility back as improved with the then outstanding, inner-financing, construction mortgage, whatever it might be.
But if they defaulted in the first phase, if they didn't get the immediate problems fixed, your worst case was they would spend $61 million and you get the airport back. That was a lot better than where you were at that point and time. That is all it is trying to say.
The Chairman: The government is in the same position as a man who is both a veterinarian and a taxidermist, and in either case you got your dog back.
Mr. Stehelin: That is one way of putting it. I should have put that in the letter.
Senator Hervieux-Payette: Mr. Chairman, I think the CBC building is a better example than Toronto. The government got it back, with the debts, I suppose.
The Chairman: Sorry, Senator Tkachuk.
Senator Tkachuk: That was good. You can do that again.
Senator Kirby: It is the end of the week. We have to allow some licence.
Senator Tkachuk: That is right. Item number 3,
The risk of development for each phase based on the present transaction is borne by Mergeco and the lenders. The risk of future phases remains with the Crown.
What does that mean?
Mr. Stehelin: Basically, what that is saying is that once a phase was started, the way the transaction was structured is that obviously Mergeco was on the hook for it because they contracted to do that, but if they didn't make it through that phase, the lender was potentially on the hook to finish that phase.
So once he started to put his money in, if they got halfway through and they were not finished and they defaulted, the lender had now a major problem because he either had to elect to abandon and stop this thing, or he had to finish to keep the lease in good standing.
But once he finished the phase, if it defaulted the day after, before they started the next phase, that was the government's problem. The government would then have to do it.
Senator Tkachuk: Number four, "the Crown would not be required to borrow in the public market to fund the redevelopment project." So there were no requests for government guarantees for the bond issuance or for cash in the bank?
Mr. Stehelin: No. It had to be a stand-alone, commercially viable transaction. The government provided no guarantees, backstops, nothing.
Senator Tkachuk: We get to number five, and this was an interesting point because it has been maybe discussed, but I don't think it has been as well discussed as you lay it out here. In addition to the value of the transaction to the Crown, you state something in number five on page 6 of the same document. The gross tax paid to both the federal and provincial governments by Mergeco over the term of the lease is $3,808 million, is that correct?
Mr. Stehelin: Yes.
Senator Tkachuk: It says:
These tax payments have not been factored into the T1, T2 base case model prepared by Transport Canada finance, and the present value for the federal share would add to the value of the ground leases calculated by Mergeco. The present value of these payments at 8.5 per cent is estimated to be $197 million in federal taxes and $114 million in provincial taxes, taking into account the value of the transaction would be $1.6 billion to the federal Crown.
That is intact?
Mr. Stehelin: That is a combined number. That is both tax and the present value of the stream of lease payments.
Senator Jessiman: Pretty attractive deal.
Senator Tkachuk: So it would seem to me that the taxes - the government, of course, they don't tax themselves, but nonetheless, they win on the basis of the lease and then if the company does well in managing the properties, they win on the basis of taxation. In other words, the better they do, the more taxes they will pay?
Mr. Stehelin: That is correct.
Senator Tkachuk: The conclusion then is:
Based upon the available information and keeping in mind that there is upside in terms of the Crown's return, we feel a net present value of the ground lease of between $800 million and $900 million is fair market value consideration to the Crown.
Anymore to add today to that?
Mr. Stehelin: No.
Senator Tkachuk: Which has been the number, give or take $10 or $20 million, which has been bandied about almost from all of the evaluations that have taken place.
Mr. Stehelin: I would add two cautions for you. I stated earlier that when you look at rates of return and you look at that sort of thing, you ignore taxes, the 14 per cent, et cetera. It is very difficult to do a calculation, particularly in this case, because you knew that there was going to be substantial capital cost available to these people. There is a timing issue around recovering that tax. That is the first caution, okay?
But eventually, it is not like your taxidermist and undertaker, but maybe it is, death and taxes, two sure things, okay? You are going to pay it eventually.
Senator Gigantès: For individuals.
Mr. Stehelin: For corporations too. I beg to differ. That is a caution. There is a timing issue around those taxes. There is a structural issue around how this transaction was structured. And you don't know when the tax might have been paid and on what basis. That is the first caution. There are some arbitrary assumptions.
The other comment I would make is that finance spent a lot of time running models around what this transaction was worth to the Crown. I know because I dealt with their people, and they did their own analysis which we talked about, we saw, we knew what their base case was. Transport had its own base case.
When you take all of those and sort them out, the conclusion of all of those people was that - you can argue here $50 million one way or the other, it is irrelevant, but on balance, this is a good deal for the Crown.
Now, there are all those other caveats around it, but having said that, based on what everyone knew at that point, it wasn't just us that was looking at this number. There were a lot of people looking at this number.
Senator Hervieux-Payette: May I ask a clarification? When were they in your model that you were running, because we are talking always about the deal of 57 years?
Mr. Stehelin: Yes.
Senator Hervieux-Payette: And, of course, you were telling us that after 25 years some reinvestment had to be made, so that there was something certainly missing in the whole question for the future, but let's look at the first 25 years. When you talk about taxation you talk about a 57 year, and when do they start to pay taxes?
Mr. Stehelin: Again, it is hard to tell because of the structure, but they probably - I mean simplistically put, they had a timing difference because of the capital cost rates versus the depreciation rates. They probably had a timing difference of - it would move because they would start to take it as they did the first 160 and it moves out, so it starts to kick in more and more and more. Probably six to eight years.
Senator Hervieux-Payette: Before they would be paying taxes to the Crown?
Mr. Stehelin: That is probably as close a number as you can get.
Senator Hervieux-Payette: After day one of the operation or after the start because you have the interim financing?
Mr. Stehelin: After November of 1993.
Senator Hervieux-Payette: So you would start then and run for six to eight years before they would start paying taxes?
Mr. Stehelin: They probably had an off-shelter in capital cost to get them seven or eight years out.
Senator Tkachuk: This morning, I covered the after tax rate of return, and I think the witness went through it quite thoroughly.
I asked that question on the 12 to 16 per cent, it being reasonable. I believe I did that this morning. So I believe we have covered that. I have no more to add on this.
The Chairman: Senator Jessiman?
Senator Jessiman: I would like to come back, if I may, to this second report. In what capacity would you have been sent either report? Do you know?
Mr. Stehelin: Where are we back to in now, sorry?
Senator Jessiman: The Nixon report. Now, the Nixon report is dated November 29th. The Crosbie report is dated November 26th.
Now, I can't believe there is a report after this report, but is that a possibility in your mind? There is another report after this one or is this the last one that we are looking at now, or do you know?
Mr. Stehelin: The only report I saw until about six months ago was the one that came with the press release.
Senator Jessiman: Which is this one, November 29th?
Mr. Stehelin: I do not know what the dates are.
Senator Jessiman: In what capacity did you see the second report?
Mr. Stehelin: I have seen the second report.
Senator Jessiman: Were you given it officially?
Mr. Stehelin: No.
Senator Jessiman: So you weren't - but you have read it?
Mr. Stehelin: I read it.
Senator Jessiman: And you can't remember now whether it is dated before or after November 29th?
Mr. Stehelin: I didn't even want a copy. Thank you very much.
Senator Jessiman: But I know you didn't want it, but was it sent to you by a client or do you know?
Mr. Stehelin: I am not going to get into it more than what I have said. I have seen the report.
Senator Jessiman: Did it come to you in the mail?
Mr. Stehelin: I am not going to discuss it. You can go at it any way you want. I have seen two reports, period. Full stop. I only have one.
Senator Jessiman: You have seen two.
Mr. Stehelin: But I only have a copy of one.
Senator Jessiman: You didn't get it officially in your capacity as chartered accountant acting for Transport Canada. Do you know who provided you?
Mr. Stehelin: Throw me in jail. I am not even going to talk about it.
Senator Tkachuk: You sound like the press.
Mr. Stehelin: I will talk about anything else. I will not talk about that. I can't. It's not appropriate.
Senator Jessiman: Have you been sworn to secrecy?
Mr. Stehelin: No. I just told somebody I wouldn't. When I tell somebody I won't do something, I will not do it.
Senator Jessiman: There is no doubt it was different than what you have read?
Senator Hervieux-Payette: You can ask the question to Mr. Nixon. Mr. Nixon will appear.
Senator Tkachuk: You are quoting memos from all kinds of people witnesses don't even know anything about and they have never seen.
Senator Hervieux-Payette: We have seen one paper and let's ask Mr. Nixon.
Senator Tkachuk: I am going to ask every witness about this second report.
Senator Jessiman: I think before we see Mr. Nixon, we certainly have the opportunity to see whatever report. Maybe this is only one report. There may be four reports. I don't know. This witness has seen two.
Senator Tkachuk: Is this one good enough Mr. Goldberg? I mean, I don't know.
The Chairman: Another subject, please.
Senator Jessiman: That's all I had.
Senator Hervieux-Payette: Just a small question on the report, on page 2. Your 2. You mention,
It is important as outlined in our previous report that the Air Canada matter be dealt with. Our view that the transaction is financable is based on the assumption that the letter of understanding of July 21st, 1993 between Mergeco and Air Canada will receive Air Canada board of approval, and in due course a lease containing the general terms as contained in the letter will be executed by the parties.
Your report was submitted August 17 and there was not the lease that was signed? I mean, at that time the Air Canada lease was not signed, it was not the deal concluded with Mergeco, it was not finalized?
Mr. Stehelin: At that point there was a letter of intent which I think is about a four page letter. And the only caveat on the letter, not having looked at it for awhile, is that it is subject to the approval of Air Canada's board.
Mr. Nelligan: May I assist? By coincidence, when the Air Canada group were here, I happened to see an extract of the minutes of their board of directors which was sometime in the middle of August relating to this point, and I also saw a fax of that to Mr. Rowat on October the 4th. It was one of the conditions precedent to the distribution of the contracts. So I know earlier witnesses could have given you that, but I don't think we got around to asking that question.
Senator Hervieux-Payette: Why I am asking that question, during the recess, I was discussing about real estate, usual basic rule for financing a transaction which was to have the anchor tenant that would have signed, otherwise you cannot go to the bank and borrow one cent unless you have that, and that should be a significant tenant I am talking about, the anchor tenant.
That is why I mentioned the importance, and it may be a five line paragraph, but I wish to underline that by mid-August, which is just a few months before the overall transaction, there was not already a deal or a lease with Air Canada.
Mr. Nelligan: I think there was a deal. It wasn't confirmed by the board of directors until about the 15th of August. And then the actual certification of the extract from the board of minutes was delivered to Mr. Rowat on October the 4th. That is a record that may be available in the Rowat materials. I am not quite sure.
Senator Hervieux-Payette: For me, we have not seen that lease and for me a letter of intent, I think I have seen dozens of them when I was with the engineering firm, and they led to the conclusion of the transaction one time out of five, so it was not a sure deal when you had a letter of intent. You had a letter of intent that means you intended to do something, but the conclusion was not always realized.
Mr. Nelligan: This was realized on the 15th of August.
Senator Hervieux-Payette: Okay. Thank you.
The Chairman: Okay. Mr. Nelligan?
Mr. Nelligan: Would you turn to the Crosbie report please, Mr. Stehelin? Do you still have a copy in front of you?
Mr. Stehelin: I am not sure. Yes, I do.
Mr. Nelligan: This is the report dated November the 26th. If you would turn please to the question of lease term, and this is a discussion by Mr. Crosbie of the affect of the lease term, and could you read that paragraph to yourself to make it speedier, and give us any comments you have on whether you agree with his opinion on financability on a shorter term?
Senator Hervieux-Payette: Which page?
Mr. Nelligan: Sorry, this is on page 8 of the Crosbie report. Other considerations, lease term.
Mr. Stehelin: What is your question again?
Mr. Nelligan: He suggests that the full 57 years was not necessary for the purpose of financability, suggesting that a shorter term may have been possible. We have heard other witnesses on this question and I wondered if you had any views.
Mr. Stehelin: The way he puts it here is he says it may well have been possible. Yes, it may well have been possible. Anything is possible. I think the reality of the situation at the time was a number of the financial institutions - I will give you an example.
The Bank of Nova Scotia's head office in Toronto is on a land lease. That land lease runs for 100 years. That lovely big building that Mr. Campeau built is on a land lease. Couldn't sell the building, tried for 10 years because of the land lease. Land leases are not attractive to lenders generally. The longer the land lease, the more attractive or the more comfort they have. Anything was possible. I am not going to dispute that.
I think the protection or the term issue leads you back into that world class facility clause in all these agreements, and you know, beyond that I can't add anything to it.
Mr. Nelligan: The second question I have is with respect to the report of which we have discussed earlier from the Department of Industry by Ms Connie Edlund. Did you have occasion to review that report when you were working for the department?
Mr. Stehelin: Not when I was working for the department, no.
Mr. Nelligan: Have you had an opportunity to look at it since?
Mr. Stehelin: No, I have not looked at it in detail.
Mr. Nelligan: I only want you to comment on one specific paragraph, bearing in mind that this is a report in November, 1992 dealing basically with the original Paxport proposal. It says,
In its operating forecasts ATDG has assumed that management fees will make up a reasonable 15 per cent of its total labour bill. Paxport's forecast show continually rising management fees so that by year 2003 such fees will make up a staggering 42 per cent of its labour bill.
Were you aware of this type of calculation of management fees, and did you yourself form any opinion as to the management fee element in the Paxport proposal?
Mr. Stehelin: You have two different ways of calculating the management fee. She has calculated a number that is based on payroll I believe is what you just said, right?
Mr. Nelligan: Yes.
Mr. Stehelin: The management fee in all of the projections in the model and the numbers that were run is a percentage of gross revenue. Most management fees run on gross revenue. If I take the gross revenue management fee and calculate it based on salaries alone, yes, I will come up with a big per cent. I assume that is what she has done, but I don't know.
Mr. Nelligan: She refers to it as a percentage of the labour bill.
Mr. Stehelin: I am not sure what that is relevant to. If you get a manager to manage your office building, he charges you a percentage of gross revenue. He does not charge you a percentage of wages.
Mr. Nelligan: Well, in your experience, is attributing management fees to labour a part of the practice of accountants?
Mr. Stehelin: I wouldn't calculate a management fee on that basis. It is normally calculated as a percentage of gross revenue.
Mr. Nelligan: In this case, did you give any consideration to the reasonability of the management fees proposed by both bidders, or you only had to deal with Paxport, excuse me, in the reverse case?
Mr. Stehelin: The management fee is for four, four and a half or five per cent of gross revenue.
Mr. Nelligan: How does that compare to the standard in the industry?
Mr. Stehelin: Normal.
Mr. Nelligan: Thank you. Those are all the questions I have.
Senator Kirby: I only had one very short question. Back on what you said was the other version of the Nixon report that you got, how do you know it was written by Mr. Nixon?
Mr. Stehelin: May not have been.
Senator Kirby: I beg your pardon?
Mr. Stehelin: It may not have been. It was on his paper, but it may not have been.
Mr. Nelligan: What was the name on it, sir? Why did you say it was Nixon?
Mr. Stehelin: Looks identical to the one you have got.
The Chairman: Identical in form, not in -
Mr. Stehelin: It looks identical to the one you have got.
The Chairman: It looks like it but you said it was different?
Mr. Stehelin: Has some differences.
The Chairman: Has some different words in it?
Mr. Stehelin: Yes.
The Chairman: Mr. Stehelin, you have been a very helpful witness. We thank you very much.
Senator Kirby: An accountant we can understand. Such a refreshing change.
The Chairman: Our next witness is Mr. Sinclair of ATAC.
Senator Kirby: How about the Air Transportation Association of Canada?
The Chairman: Mr. Nelligan will introduce our next witness.
Mr. Nelligan: Senators, we have with us today Mr. Gordon Sinclair who for a considerable period of time was the head of the Canadian Airline Association of Canada and has only recently retired.
We are already aware of some of the letters which he sent to various officials on the Pearson matter, and he is available to us now to answer your questions on that subject.
The Chairman: Mr. Sinclair, I want to apologize to you. I took it upon myself to ask Mr. Stehelin to come back, and for all practical purposes to cancel your appearance and I regret because I know you broke your vacation off to come here - and anyway, you are here and I thank you very much for that. Now, as you know, it is our habit to swear witnesses.
(Gordon Sinclair, sworn:)
The Chairman: Have you any opening statements you would like to make, Mr. Sinclair?
Mr. Gordon Sinclair, (retired) Air Transport Association of Canada: Just a very brief comment, senator. I furnished a curriculum vitae to the staff of the committee, but I think, in case you haven't read that, you should know, members of the committee should know that for a period of nine years prior to 1985 I was an assistant deputy minister in the Department of Transport. My latter three years there I was Air Administrator, which I was responsible for both the aviation and airport groups.
I retired from the government in the fall of 1985. Subsequently, I joined the Canadian Air Transport Association which is an industry association of commercial aviation operators in Canada. Membership of that association includes both Air Canada and Canadian, as well as all the large charter carriers, many small charter carriers, at that time many helicopter operators, some 40-odd flying clubs across the country, various speciality operators, a total of about 120 operator members of the association, as well as 100 associate members who provided various materials and services to the commercial aviation industry.
The association members account for more than 95 per cent of commercial aviation revenues in Canada and approximately 98 per cent of the revenue passenger miles or kilometres flown by Canadian operators.
My involvement in this part of your endeavours is quite minimal. My major activity during that time with respect to Toronto was on the runway development projects. I am intimately familiar with the Toronto Airport and its workings. Thank you.
The Chairman: Thank you. Senator Kirby?
Senator Kirby: Thank you, Mr. Chairman. Welcome again, Mr. Sinclair. We knew each other when we were both in the bureaucracy. I wonder, Mr. Chairman, what I would really like to do basically is to have the witness read into the record just certain excerpts to make it simple from several of the letters he has, and I will look at my staff. I will use the letters B, C, D and E. You might as well distribute all four, B, C, D and E.
I have copies for you, Mr. Sinclair, to make it easy, and copies for my colleagues on both sides of the table. Could I ask you a question for a minute? When ATAC develops a position, I mean as you said, you represent 95 per cent of the passenger air miles flown in Canada, the position then that the association develops is really the position of the people that really use airports, I mean, companies that use airports as opposed to passengers, is that right?
Mr. Sinclair: That is correct.
Senator Kirby: In the documents I am going to refer to, and I will come to some specific excerpts in a minute, is it fair to say that they reflect a pretty strong view of the association as opposed to - I guess I am trying to get some sense as our policy decision is sometimes 51-49, because you are quite definitive in your letter, so is it a pretty solid view of the association?
Mr. Sinclair: The association always attempts to get consensus views. There is never 100 per cent unanimity on any subject, but there always is a substantial consensus on most issues when we take a position. If there is substantial differences then the association does not take a position.
Senator Kirby: So 51-49 you wouldn't take a position, okay.
Your first letter, which is September 6th, 1991. Have they been handed out to my colleagues? It is the one with a letter B on it, but anyway, September 6th, 1991. I wonder if you might just read into the record beginning with the last sentence in paragraph one, that is, "It is our further understanding..." down to the end of the next paragraph?
Mr. Sinclair: Yes. Reading from the letter?
Senator Kirby: Yes, just because that is the way we have to get it on the record. That is all.
Mr. Sinclair: Reading from the letter:
It is our further understanding that the initiative for this action is stimulated by certain private developers who see an opportunity to enhance their own economic interests.
ATAC wants to make it very clear that this initiative does not come about through any demand from the air carrier industry. Transport Canada and Air Canada are just completing approximately $150 million of expansion and improvement projects at Terminal 2 which will provide the needed capacity for the next several years. It would be publicly foolish to announce that Transport Canada was seeking proposals to re-design and renovate a terminal that has just been refurbished. There is no need for such a project at this time.
Senator Kirby: The last paragraph of page 2, "We do not believe... " paragraph, can you just read that, please?
Mr. Sinclair: Reading from the letter:
We do not believe that the air carrier industry requires these terminal renovation projects at this time. The justification for such projects is not there. We also are not in agreement that development and operation of terminals by private developers is in our interest nor the interests of the consumers who ultimately have to pay for whatever is put in place.
Senator Kirby: And then on the top of the next page, I guess it is the second paragraph on the next page, you say and I will quote from the letter,
...we believe that the initiative of the private developers is neither timely nor appropriate. It does not have our support because the volume of passengers does not warrant any such projects;
And then in the last paragraph, you go on to say that you have suggested a reasoned alternative to deal with the present problem.
So in 1991 before any RFP was ever issued, you were in fact - pretty strong stuff, pretty clear unambiguous statement. You were basically saying categorically that you did not think the need to develop - excuse me, develop Terminals 1 and 2 was required?
Mr. Sinclair: That is correct.
Senator Kirby: That was based on your assessment of the demand at the airport?
Mr. Sinclair: That is correct. You will recall that we were in the midst of a very significant recession at that point and time. You will also recall that there was a substantial upheaval in the aviation industry with respect to the difficulties between Air Canada and Canadian.
1991 passenger volumes at Pearson were headed for a 15 per cent decline from the previous high in 1989 and '90. The recovery from the recession was uncertain. There is just too much uncertainty in the circumstances to warrant any other conclusion at that point and time.
Senator Kirby: That is why two months later, on November 12th, you passed a motion at your board which you then sent on to the Minister of Transport. Again, this is November 20, where you sent to the minister on November 29th, 1991. It was in fact resolution passed at your annual general meeting on November 12th, 1991 in which you say, and I will quote the substance of the resolution,
Be it hereby resolved that ATAC makes strong and immediate representations to the Minister of Transport and the Government of Canada to delay any consideration of redeveloping Terminal 1 at Toronto until the rate of recovery of passenger traffic is established and to postpone any redevelopment of Terminal 2 until the carriers using that terminal identify such a requirement.
Am I right in saying that that resolution is in a sense a formal vote at your annual meeting, so it is your board of directors or your general membership which really puts in resolution form the points - when you attach all the whereas clauses - the points that you made in your September letter, is that right?
Mr. Sinclair: That is correct.
Senator Kirby: You sent this letter to Mr. Corbeil. Did you ever get a reply to it?
Mr. Sinclair: I think I got a reply the following May.
Senator Kirby: The following May?
Mr. Sinclair: I believe so.
Senator Kirby: That is like six months later? Sorry. It's just a strange way to handle correspondence. And was it a substantive reply or by May did they acknowledge receipt of your letter six months earlier?
Mr. Sinclair: They acknowledged receipt of my letter in September, a further letter with a resolution in November, and a subsequent letter that I sent in early March.
Senator Kirby: But they were simply saying we got the letters but no attempt to deal with the points you were making?
Mr. Sinclair: No, sir.
Senator Kirby: The other letter you referred to then I presume is the March 5th one you gave us, 1992?
Mr. Sinclair: That is right.
Senator Kirby: I wonder if again if you just might read the first sentence?
Begin with, say the first sentence of the second paragraph which begins with, "This initiative...", and why don't you read the second and third paragraphs? Makes it easier.
Mr. Sinclair: Second and third paragraphs?
Senator Kirby: Of the March 5th letter.
Mr. Sinclair: Beginning "Several years ago..."?
Senator Kirby: No, it begins - this is a March 5th letter begins, "This initiative is not supported by... "
Mr. Sinclair: Reading from the letter -
Senator LeBreton: What document number?
Senator Kirby: It is my letter D if that may make it easier, 00301.
Senator LeBreton: March?
Senator Kirby: 1992.
Mr. Sinclair: Reading from the letter:
This initiative is not supported by the airline industry in Canada because it is not needed at this time. Passenger terminals are not a separate business. They are not shopping centres. They are an integral part of the service link that the consumer uses in purchasing transportation from an air carrier or a travel agent. To set up a private operator in such a monopolistic position is to inflict a major injustice on the travelling public.
Several years ago the government followed a course of action with Terminal 3 which involved a financial package which attempted to secure the best possible financial deal for Transport Canada. The prospective bidders knew they could bid with consumers' money because, if successful, they would be in a monopoly position.
Senator Kirby: Could I just ask you to explain what you meant by that? I know what you mean by monopoly position. What lies behind that sentence?
Mr. Sinclair: At the time that Terminal 3 was put out for bids, there was a two stage process, one which qualified certain bidders to proceed to the second stage, and there was no problem with that. The second stage was in effect the financial stage. In fact, the project was evaluated primarily on the financial return that it gave to Transport Canada and the Government of Canada.
In other words, any developer could bid a fairly large amount of money knowing then that he would be in a monopoly position with respect to the carriers that had to use that terminal in order to get whatever money he had committed as costs to Transport Canada. He would be able to get those costs back from the air carriers and the travelling public.
Senator Kirby: Which is essentially what Paxport did in its response to the RFP?
Mr. Sinclair: Exactly. That's why we disagreed again with that kind of approach which puts a private developer in a no-lose situation. He in effect is bidding with somebody else's money. We took a position at our annual general meeting in 1989 to ask the minister of the time to allow air carriers to construct, operate and finance their own terminals if there was sufficient volume to do so by that carrier. That request was strongly opposed by Transport Canada for reasons which I cannot fathom.
Senator Kirby: Did they ever tell you what the reasons were?
Mr. Sinclair: Just that they did not and would not do that. Their only expressed reason was that they didn't want air carriers to gain control of the airport.
Senator Kirby: At airports in the United States, does that occur?
Mr. Sinclair: Certainly.
Senator Kirby: All over the place, common practice?
Mr. Sinclair: Certainly.
Senator Kirby: And yet Transport Canada rejected the policy of private sector companies, which excluding Air Canada is what the airlines are, owning terminals, but they were prepared to let other private sector people own terminals?
Mr. Sinclair: Yes.
Senator Kirby: Strikes me as an element of non-logic there. Anyone ever attempt to explain that to you?
Mr. Sinclair: No one could ever explain it to me. The only rationale that was ever advanced, other than just a straight refusal, was that they did not want air carriers to control an airport. The response was we did not intend to control the airport. All we wanted to do was control our own operation at a terminal, which is an integral part of the business of having the passenger board the airplane, the airplane depart, arrive, and disembark the passenger.
Senator Kirby: As you say, it is common practice. I am certainly well aware of it in the United States, and it may be true elsewhere, but it is certainly common practice in the United States.
Mr. Sinclair: Yes. It is common practice in many places.
Senator Kirby: On page 2 of the same letter, the beginning of the second full paragraph, you have the following words:
The project for additional runway capacity at Toronto is by far the first priority.
Senator Tkachuk: Could I ask a supplementary? Does the federal government own the airports in the United States?
Mr. Sinclair: No.
Senator Tkachuk: Okay.
Senator Kirby: If you drop the word "federal", you will get a different answer.
Senator Tkachuk: I'm asking whether the federal government in the United States owns airports.
Senator Kirby: Other governments in the States own airports, like the New York Port Authority and others; right?
Mr. Sinclair: Some do; some don't.
Senator Tkachuk: Municipal governments here do too.
Mr. Sinclair: There are various kind of governmental authorities in airports in the United States, but the federal government, they may own a couple of them, but not any of the major or semi-major airports.
Senator Tkachuk: Okay.
Senator Kirby: Sir, I just read a sentence which talked about your association believing that additional runway capacity was more important than redoing the terminals. Again, presumably you're the people that know better than anybody, since you're the industry that uses them. This is the March 5 letter which you put to Mr. Corbeil. Again, did you ever get any response? Why did they pick the terminals if the runway was the bigger problem?
Mr. Sinclair: They didn't choose one over the other. There was no impediment to the progress of the runway project, so I had no complaint about what took place with respect to the runway project. What I was concerned about was that the introduction of a major terminal project at that time would add an unnecessary complication to the environmental hearings that were due to commence about December 1 in Toronto with respect to the runway project.
Senator Kirby: An unnecessary complication how?
Mr. Sinclair: What we were faced with at the environmental hearings was in essence a local group of activists who wished to stop any sort of development at the airport. The runway project was proceeding well. An environmental impact statement had been filed by Transport Canada with the environmental review panel. We did not want to see that project or those hearings delayed by reason of environmental people forcing Transport Canada to go back and make a major amendment to an environmental impact statement, detailing out the whole of the terminal projects, and thereby delaying the whole process for an undetermined amount of time.
Senator Kirby: Since the runways were more important to you, finishing the runways was critical.
Mr. Sinclair: Getting the runway project done through the environmental hearings process was by far the first priority for the aviation industry.
Senator Kirby: To finish off with that letter, can you read into the record your second-to-last paragraph, which is over on page 3?
Mr. Sinclair: Reading from the letter on page 3, second to last paragraph:
Mr. Minister, the newly rehabilitated Terminal 2 will be quite sufficient for the near to medium term. We believe that the initiative supported by private developers is neither timely nor appropriate. It does not have our support because the near term volume of passengers does not warrant such projects now. We believe it will be unduly costly. Transport Canada, in consultation with airport users, should take the decision as to when a new publicly owned Terminal 1 should come into operation.
Senator Kirby: Again, this was a letter to Mr. Corbeil to which you never received, as I understand it, a substantive response. I understand you eventually got a response, but it was never an attempt to explain why the department or why the government was taking a set of priorities with respect to development of Pearson that were inconsistent with the priorities asked for by the industry who are, after all, the major users of the airport.
Mr. Sinclair: We got a reasonably substantive letter from the minister which simply stated that he believed that airport terminal planning and development should go ahead at this point in time because they believed passenger forecasts warranted it. In other words, they took a position different than what we did.
Senator Kirby: So the government knew better. "I'm from the government and I'm here to help you." Is that sort of the line?
Mr. Sinclair: I hate to characterize it that way, senator, because on the runway project at Toronto, we had an excellent consultation process with Transport Canada. I believe it was a model of how government and industry should consult on major development projects. The users were brought into the project at the very beginning. Our views were sought. Our concerns were taken into account. Transport Canada's concerns and problems were also laid on the table.
We worked cooperatively through a period of four years in coming up with a runway project that we thought was operationally feasible, technically feasible, and environmentally acceptable, as well as being financially sustainable, and we were very disappointed that that kind of consultative process that had been in place and working was not used on the terminal process.
Senator Kirby: Since it's the same airport, why was it a completely different process? Did anyone ever explain to you why a completely different process was used with respect to the terminals than was used with respect to the runways?
Mr. Sinclair: No.
Senator Kirby: Last, if you look at your December 8 letter, this time to the current Minister of Transport - December 8, 1993. I will be clear on the year. This is your letter to Mr. Young. Would you read into the record your first two paragraphs? The second paragraph, I think, in fact, talks about the process that you liked.
Mr. Sinclair: Reading from the letter of December 8, 1993, the second and third paragraphs - first and second?
Senator Kirby: First and second.
Mr. Sinclair:
Your government's decision on the terminal development at Pearson will be well received by the air carrier industry.
Such a decision allows all parties the opportunity to participate in the rational planning of the future terminal development at Pearson. There is a model for such a process. I refer particularly to the participative process that was conducted by Transport Canada for the planning of future runway development. In that process we, as the users, were made part of the planning process and gladly contributed our operational and business skills because it was in our interest to do so. We would like to see such a process set in motion with respect to terminal development.
Senator Kirby: And therefore, you as an industry approved of the cancellation of the T1T2 contract?
Mr. Sinclair: Yes.
Senator Kirby: So just one last comment: As I have listened to you and read the letters, if I was to do sort of a bullet point summary of what you said, I think I would put it roughly as follows:
Number one, that private sector ownership of airport facilities as a whole generally means increased costs to the travelling public, and your illustrative example of that is T3; secondly, that runways are a priority and that it doesn't make sense to proceed with T1T2 development in advance of having established a policy on runways; number three, that because of the recession, the demand for increased passenger capacity at T1 and T2 wasn't required; and number four, that there was concern that proceeding with T1T2 would jeopardize the environmental process related to the runways which were a higher priority for you; and number five, you liked the process which had been followed for runway development and didn't like the fact that there was no consultative process in anywhere near the same sense with respect to T1T2, so on process grounds, you also objected to what had happened.
Therefore, for all of those reasons, you were opposed to proceeding with the T1T2 development and in fact were therefore pleased when in fact it was cancelled. Is that a fair summary of what the letters say?
Mr. Sinclair: That's a fair summary, with one addendum, and that was that Air Canada had certain concerns with respect to Terminal 2 and certain projects that they wanted to see done, particularly in transport or in international. And we said in those letters that the decision as to the scope of those projects and the timing of those projects should be left to the anchor tenant in the terminal.
Senator Kirby: At no point did you ever get what you regarded as a satisfactory response to why government, in light of that bullet point summary I gave, why government was proceeding with T1T2 in private sector hands?
Mr. Sinclair: No, sir.
Senator Kirby: Thank you, Mr. Chairman.
Senator Hervieux-Payette: Just a supplementary on the three questions. In your two previous letters, I mean, the one - I just want to mention the exact date - to Mr. Corbeil, the first one of September 6, 1991, and then the second one, March 5, 1992, you send copies to the deputy minister, the minister of State, and Toronto area ministers, and also to Mr. Barbeau, in both cases. And then in the letter to Mr. Young, in December 8, there is only a copy to the deputy minister and assistant deputy minister. Could you tell me why? I mean, you used to send to all the ministers of Toronto a copy of your letter previously, and there was no copy of this letter to the other ministers.
Mr. Sinclair: Senator, the decision had already been taken at that time. There was no further work that the association had to do in that regard, and so we left it just to Minister Young to inform the rest of his colleagues with respect to our position at that time.
Senator Hervieux-Payette: Thank you.
The Chairman: Mr. Sinclair, I empathize with the responsibilities you've had over the past number of years before your retirement. I too was the president of a national trade association in 1956 - I think I met you around that time - and it was always difficult to get a common consensus among your membership. But in your membership, which, as you say, included our two major carriers and helicopter people, flying clubs, and charterers, people like that, it's difficult to know where to start.
Senator Kirby makes a point of the delay in receiving a reply to your letter to Mr. Corbeil.
Senator Kirby: I was not making a point. I just asked him if he ever got a reply.
The Chairman: Did you get a reply from your letter to Mr. Young in which you asked:
We would like to see such a process set in motion with respect to terminal development.
You congratulate him on his decision to cancel the Pearson development plan, and then you say:
... we, as the users, were made part of the planning process and gladly contributed our operational and business skills because it was in our interest to do so. We would like to see such a process set in motion with respect to terminal development.
Did you get a reply?
Mr. Sinclair: Not that I recall.
The Chairman: Didn't get a reply at all?
Senator Jessiman: It's only two years.
Mr. Sinclair: I can't recall ever getting a response from Minister Young.
The Chairman: Going back to your failure or delay in getting a reply from Mr. Corbeil, did you ever get any acknowledgment at all from his department? This is Berigan and Heed, 12th of December, '91. And as we understand, the minister's office returned the proposed response to Mr. Sinclair's letter of September 6 to your office to be held until an RFP decision is made, et cetera. Did you ever get any letters at all with regard to that?
Mr. Sinclair: I think we got the standard response that, "The minister has received your letter and will respond to it in due course." Just an acknowledgment letter.
The Chairman: Yes. Well, then, in '91, when you wrote Mr. Corbeil, you say there is no need for such a project at this time, summarizing the letters. Terminal 3 was up and operating at that time.
Mr. Sinclair: Yes.
The Chairman: And going back earlier to our maybe mutual difficulties in getting agreement among our members, did you say that Air Canada and Canadian both passed a resolution at that time with respect to their opposition to the Pearson Development Corporation's plan, or the plan to come forward with a request for proposals?
Mr. Sinclair: No, I did not say that.
The Chairman: I thought you were talking about a resolution from the board.
Mr. Sinclair: There was a resolution from the annual general meeting of the association which was attached to the November letter that we sent to Minister Corbeil.
The Chairman: In other words, you had the full endorsement from your membership?
Mr. Sinclair: The resolution was passed at the annual meeting of the membership, yes.
The Chairman: That's amazing. I never had that kind of unanimous response. Who was there at that meeting? Were they all there, all your people, everybody, representatives of Air Canada, representatives of Canadian, et cetera?
Mr. Sinclair: Yes. There was representatives of both major airlines there. Representatives of most of our membership was there.
The Chairman: Well, yesterday we had representatives from Air Canada here, and they say, on page A-6, yesterday's testimony:
The ideal time frame was 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.
Then, Mr. Lamar Durrett:
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.
And again, in answer to a question:
But were you satisfied -
This is to Air Canada.
- that the agreements that were signed in October 1993 would have greatly helped Air Canada meet the demands that are now being put on it right now in a much more comfortable time frame than you are stuck with right at this moment?
And Durrett answers:
Air Canada's senior management endorsed and Air Canada's board of directors approved and Air Canada executed an agreement to do exactly that.
Mr. Sinclair: Mr. Chairman, I think you must recall that my letters and my interventions in this matter took place in late '91 and very early '92. There is no doubt that Air Canada had definite developmental plans for Terminal 2, and they were proceeding with that development. I took no part in their deliberations based on the call for proposals that occurred in the spring time of 1992. From that point on, Air Canada acted on their own account, as was quite proper, because they were by far the major tenant of Terminal 2.
If our proposition of 1989 had been accepted by Transport Canada, that air carriers could develop their own terminals, then I suggest that Air Canada probably would have been sufficiently further ahead than even when - of the circumstances that they were in in late '91 or early '92. At that point in time, we were still in the depths of the recession that took place. You may recall there was considerable difficulty between Air Canada and Canadian. There was a very uncertain horizon at that point in time as to how significant the recession was going to be and how long it would continue.
Now, there was a very cautious approach to undertaking significant commitments for future capital development. Because Air Canada was approximately an 85 per cent tenant of T2, they were in a very unique position, and they acted as properly on their own behalf. The association did not act beyond the spring time of 1992, shortly after my last letter to the minister.
The Chairman: When did you retire from the Air Transport Association?
Mr. Sinclair: The end of March, 1994.
The Chairman: Who is your successor?
Mr. Sinclair: My successor is John Creighton, formerly with First Air.
The Chairman: Would Mr. Creighton, if he was here or asked - was he asked? Counsel advises me that he declined to appear.
Mr. Nelligan: If I may just explain, I spoke to Mr. Creighton, and he explained to me that he was not involved in the affairs of the association while these negotiations were going on, and that since he took office succeeding you, that their association has not taken any part in any matter relating to the Pearson airport, so under those circumstances I agreed with him that there was no point in him coming forward.
Mr. Sinclair: That's correct.
The Chairman: So that if he was dragged here to testify, he would not be making the same testimony that -
Senator Gigantès: You don't know that. You're assuming.
Senator Tkachuk: Could I just have a clarification here? Do you speak, Mr. Sinclair, on behalf of the Air Transport Association of Canada?
Mr. Sinclair: Today?
Senator Tkachuk: Yeah.
Mr. Sinclair: No, sir, I do not. I have retired from that organization as of the end of March, 1994.
Senator Tkachuk: You're here as an individual; you're not speaking on their behalf?
Senator Kirby: In fairness, he is here to comment on documents filed which he wrote at a time when he was president of the association in the same way we've had all kinds of other witnesses who are now in other jobs in the bureaucracy, for example, who were commenting and are no longer in the Department of Transport. We've had -
Senator Tkachuk: I didn't ask that question. I understand that. I'm just asking now whether he does. I just want to make it clear.
Senator Hervieux-Payette: He is here as another president.
The Chairman: It's just helpful to us to have some contemporary testimony. That's all. And anyway, I will -
Senator Gigantès: Selected, of course, to suit your views.
The Chairman: Of course.
Senator LeBreton: Mr. Chair, just before I question this witness, before we conclude today, I want to go back to some evidence this morning on a point of clarification, but I will do it at the end of this witness, if you don't mind, Mr. Chair. It will only take two minutes to do.
Welcome, Mr. Sinclair, and thank you for appearing. I'm just not exactly clear about the make-up of your organization, so I would just like you - I know there is a lot of members in it, but I would like you to tell us a little bit about your organization again, who belongs to it, and what are the objects and purposes of the organization. Like, what is your mandate?
Mr. Sinclair: The Air Transport Association of Canada is an industry association whose members are primarily aviation operators in Canada. The term "aviation operators" includes the national airlines, Air Canada and Canadian; all the regional airlines in Canada, such as Air Nova or Canadian Regional, those kinds of airlines. It includes many other independent airlines such as Bearskin Airlines, that kind of operator. It includes various specialty operators who do crop spraying or agricultural work. It also during my time included some 30-odd helicopter operators throughout Canada.
It also included a substantial general aviation category primarily made up of 40-odd flying clubs across Canada who engage not only in flying training but also charter work. There were approximately 110 to 120 operator members in the latter part of my tenure there.
There was also another class of membership which we called associate members, who were those companies who provided goods and services to the commercial aviation industry. It was a diverse group, including the major manufacturers such as Boeing Aircraft Company, Airbus, McDonald Douglas, and included various insurance agencies, companies that were active in the aviation industry. It included various consulting firms who did aviation work. They numbered about 100 members.
We represented virtually all of the commercial aviation interests in Canada with the exception of those who were represented by the Canadian Business Aircraft Association, which is the corporate aircraft association in Canada, and we did not represent those individuals who were members of the Canadian Owners and Pilots Association, which in essence is private aviation in Canada.
The work of the association was primarily professional technical in nature, in areas such as flight operations, aircraft engineering and maintenance, airport operations, air traffic control operations. We also engaged in the other kinds of activities of a more economic nature that industry associations do get themselves involved in such as tax work, various things of that nature. We described ourselves as a professional technical group.
We were probably the prime group that Transport Canada consulted with in terms of aviation activities of various kinds. I like to think we enjoyed a cooperative relationship with Transport Canada during that time. We certainly did during the runway project which I indicated before we held up as a model of good and solid industry-government consultation during a - which was a fairly difficult issue. We did the same thing with respect to the expansion of runways at Vancouver International Airport. We consulted with Transport Canada, and they have sought our advice on various issues with respect to what I would call technical and professional aviation in Canada.
We did not regard ourselves as a confrontation body. We regarded ourselves as professional technical group that was interested and committed to aviation safety and the efficiency of various aviation operations.
Senator LeBreton: That's a rather large and all-encompassing body. How many staff did you have in your organization?
Mr. Sinclair: About 15.
Senator LeBreton: Fifteen?
Mr. Sinclair: Fifteen.
Senator LeBreton: And all of these organizations that you've listed, what would normally happen? Would there be one person designated from each of these various organizations that, like, you had on the mailing list, or how did you communicate to your membership? It's a rather large and all-encompassing membership. How would you have communicated to them?
Mr. Sinclair: By several means. Yes, there was one designated official representative who would sometimes act as a conduit on very high-level matters, but we also had, as many trade associations do, a whole series of committees set up on various technical subject matters, and that we would recruit various representatives from our membership to participate in those committees in response to their own interest in the subject matters. And there was perhaps, I don't know, somewhere around 30-odd different committees of the membership, and we would tend to pull specialists from our membership to assist on whatever issues might come up in whatever of the areas they were interested in, but primarily in the professional technical area.
Senator LeBreton: How large is your board of directors?
Mr. Sinclair: The board of directors was approximately 15 people, I believe.
Senator LeBreton: As opposed to the 15 staffers? There were two different groups?
Mr. Sinclair: Yes.
Senator LeBreton: Did the board of directors represent the major elements of your association?
Mr. Sinclair: Yes.
Senator LeBreton: Did you have a member from Air Canada and one from Canadian?
Mr. Sinclair: Yes. The membership on the board of directors was divided up into what you might describe as industry segments. Because Air Canada and Canadian were such a large portion of our membership, we made sure that there was an Air Canada and Canadian representative on the board. There were, as you know, many regional airlines in Canada, and I believe there were five spots reserved on the board for regional representation. We had a substantial representation in terms of numbers of members from the general aviation community, and there were three positions on the board reserved for that category. We had a substantial helicopter operator membership, and there were two positions on the board reserved for them. We made provision on the board for a representative from our associate members, who was a participating but a non-voting member of the board.
Senator LeBreton: Of course there are many organizations in Canada like yours. I'm on another committee where we have organizations representing the industry, like yours, of course, does. Would you consider your particular organization as a lobbyist organization? Not in the terms of unfortunately the lobbyist organization is unfortunately tagged as, because they're not like that at all, but would you consider yourself a lobbyist organization?
Mr. Sinclair: It all depends on your definition of "lobbyist". The short answer to the question, yeah, probably, in that the industry association was put there to advance the interests of the industry, and in that respect, yes, you qualify as a lobby. I don't quarrel with that.
I like to think that we were a very responsible industry organization because Transport Canada on many occasions sought our views on particular initiatives, consulted with us before they came down with regulations. I think we were able to make a valid contribution, a professional technical contribution to aviation safety, which we are committed to.
So in that respect, I don't like the term "lobbyist" where it goes - where it's married with aviation safety, because I don't think it fits. Where we were dealing with more commercial interests, yes, you could characterize us as a lobby group. I don't think there is any doubt about that. We made representations to government in the same way as any other industry association would on economic issues.
But on technical issues and aviation safety issues, I think we were more a repository of good technical knowledge, more on the how to do something logically as opposed to what it is that should be done. Transport Canada would come up with the problem or the what, and we worked through as to whether - you know, identification of whether there really was a problem. If there was a problem, how would we logically address it.
And our consultation, I think our value to Transport Canada was in how could you logically address a particular problem in a way that made sense and did not put unfortunate burdens on an industry which has had its own share of burdens.
Senator LeBreton: Have you ever had to register as lobbyists?
Mr. Sinclair: Yes.
Senator LeBreton: Are you still registered, your association, as lobbyists?
Mr. Sinclair: Yes. I'm no longer with the association. I am not personally registered with a lobbyist, nor do I conduct any lobbying activity. But yes, the association is registered in accordance with the law.
Senator LeBreton: In your work around the country, and in appearances representing the industry, how does your organization authorize public appearances by folks such as yourself?
Mr. Sinclair: There is no authorization process. As president and chief executive officer of the organization, I was responsible to the board of directors for my actions and accountable to them for them. I believe I had the confidence of the board because they allowed me a significant amount of latitude in what I could do on my own initiative. Where I thought it was appropriate, I would consult the board on major issues. Issues that the board had a particular concern with, they would instruct me at regular meetings of the board of directors.
Senator LeBreton: Yes. Just from reading the mountain of material we've had on all of the matters, I got a sense from the correspondence, and you can correct me if I'm wrong, but I got the sense that your organization wants airport construction either to be undertaken by the Government of Canada or through airlines or groups of airlines. Is this a correct assumption?
Mr. Sinclair: Not quite as you phrase it. If I might just talk about runway development for the moment, our first priority was to have government do it in the traditional way. As we got to the late '80s and the very early '90s, governments, like so many other organizations, were having difficulty raising capital money. At that time, we put forth various initiatives with respect to the runway project where the industry would undertake to form a consortium to finance the runway development as it was needed and would develop the project, obtain the financing, manage the project, and work with Transport Canada in however this was going to be operated from that point on, even to the point of contracting the operation of the runways back to Transport Canada as an option.
The reason for that was the very high priority that we placed on runway development, particularly at Pearson. So yes, where we were convinced that there was a pressing need to do something, the industry was prepared to marshall its own resources and efforts in order to assist a project to come about.
Senator Tkachuk: Supplementary, Mr. Chairman. In relation to the private/public, because I think Senator Kirby asked a question regarding a statement that you made that the association was concerned private developers would be passing on extra costs to the airlines.
Mr. Sinclair: Yes, sir.
Senator Tkachuk: Sorts of two points to my question. So take, for example, an airport that's losing money, like Mirabel. The airline - the Government of Canada subsidizes that, does it not?
Mr. Sinclair: No, sir, it does not.
Senator Tkachuk: Who subsidizes it, then?
Mr. Sinclair: The airport at Mirabel was part of a group of five airports which were turned over to local airport authorities. In the case of Mirabel -
Senator Tkachuk: That's presently; right?
Mr. Sinclair: That's presently.
Senator Tkachuk: Dorval, all of those.
Mr. Sinclair: That was done in 1992.
Senator Tkachuk: Yes. But if an airport is losing money, whether you include it in the airport authority or not, which the lease was given to the Government of Canada, to get a return of what they had before, which in the case of Mirabel wasn't very much. But if an airport is losing money, which some airports do, then would you say that the taxpayers subsidize the airlines?
Mr. Sinclair: Not necessarily. Depending upon how much use was made of an airport. As you go down in airport size, there is no way that some airports can ever break even. Get down to some of the smaller airports, there is no way they can break even. So if you wish to have airline service into those locations, then there may be occasion when some subsidy from the Crown into the operation of that airport is acceptable. That is not at issue. But if you try to make some very small airports totally financially self-sufficient, you would probably drive the service away, because it could not be afforded.
Senator Tkachuk: So the airlines would not want to, say, operate/own the terminal in Saskatoon?
Mr. Sinclair: Probably not. But, you know, when you get down to an operation the size of Saskatoon, under the right circumstances, that may be big enough to sustain an airline consortium running the terminal building, if you wish to do that.
The concern of Transport Canada, and it is a legitimate concern, is that the airline community may freeze out other competitors. That's an appropriate concern for Transport Canada, so they have to have some participation in the process to ensure that that kind of thing does not happen.
Senator Tkachuk: So in other words, the airline industry would like to own the terminals that would make money but wouldn't be that interested in the airports where they may not make money?
Mr. Sinclair: I think it could be a fair statement.
Senator Tkachuk: It is a fair statement. Why would you go to an airport that loses money?
Mr. Sinclair: It depends on your costs of providing the service, senator.
Senator Tkachuk: Let's go back to the private developer at Terminal 1. Just so I understand the airlines' logic here -
Senator Gigantès: Terminal 1 or Terminal 3?
Senator Tkachuk: Terminal 1, Terminal 2, Terminal 3, doesn't matter. If an airline builds or refurbishes or leases a terminal - let us say "a" terminal; right? - it could either co-mingle that with its own company, the airline company, or have a separate entity; right?
Mr. Sinclair: Yes.
Senator Tkachuk: It would require return on its investment.
Mr. Sinclair: It would.
Senator Tkachuk: Or would it run like a non-profit and break even for the benefit of the Canadian people, or would the shareholders of Air Canada demand that that equity that's plugged into Terminal 1 or 2 or 3 get a return on its investment? Wouldn't the shareholder demand that?
Mr. Sinclair: No, sir, I don't think so.
Senator Tkachuk: You mean I as an Air Canada shareholder wouldn't demand that? I don't think so.
Mr. Sinclair: No, no. You leap ahead before you let me answer. The operation of a terminal by an airline could be roughly the equivalent of operating a maintenance base. It's just one more adjunct in the necessary production process to deliver to the consumer the transportation he requires from Point A to Point B. So whether or not they do it by a separate subsidiary corporation or whatever, it all gets melded up into a consolidated picture.
So I think the operation of a terminal is not a profit centre, so to speak, but one in which, if they are going to levy charges, they would break even and take their corporate profit wherever.
Senator Tkachuk: I don't get it. You cannot break even and take your corporate profit wherever.
Mr. Sinclair: Senator, it's just like owning a wholly owned subsidiary that is part of your manufacturing process. The operation of an airline terminal is nothing more than one stage in the production process of delivering transportation to a passenger. No different than operating a maintenance base, no different than any other aspect of an airline's operation, in my opinion.
Senator Tkachuk: If you operate a maintenance base, is it true that in some airlines, they may have other airlines get fixed - other airplanes maybe get fixed there?
Mr. Sinclair: Yes, sir.
Senator Tkachuk: Would they fix those other airplanes at a loss?
Mr. Sinclair: No.
Senator Tkachuk: Would they try and make a little profit?
Mr. Sinclair: Certainly.
Senator Tkachuk: They wouldn't break even.
Mr. Sinclair: They would attempt to make it a reasonably profitable entity. Otherwise, why continue it?
Senator Tkachuk: Exactly. So let's go back to the Terminal 1. See, I don't like the inference that because a developer is - because it's a private individual, that there is - I mean, there is a return on the investment, and the airline, the equity that the airline would be putting in, the shareholders would demand the same thing, that there be a return on investment. So I'm trying to figure out why it would cost more. I mean, we've been told by Air Canada yesterday that they pay about the same as the rest of the world.
Mr. Sinclair: It's simple arithmetic. If you're going to introduce a profit factor into the operation of a terminal, then you're going to add to the cost. If you're going to introduce a guaranteed return on assets, you're going to introduce another cost element to the consumer down the line.
Senator Tkachuk: Well, I think that if Air Canada came in here and told Transport Canada that they would operate a terminal as a benevolent society, Transport Canada would be foolish not taking them up on it. But I don't think they'll do that.
Mr. Sinclair: Senator, if Air Canada came in and said to Transport Canada, "We will operate Terminal 2," and Transport Canada said, "Yes," my opinion is that Air Canada would leap at that opportunity.
Senator Tkachuk: Because they'd have a monopoly on Terminal 2, then. They might gouge other airlines.
Senator Jessiman: But there is more than just -
Mr. Sinclair: There is options. That's why you need a countervail in the form of a publicly operated or independent- operated Terminal 1. It's in an airline's interest to try and minimize its costs. Many airlines believe that by operating their own terminals, they can minimize costs over and above somebody else operating them at a guaranteed rate of return. It's simple arithmetic. That's why they do it in the United States. That's why they do it in other parts of the world. When there is sufficient volume to do so.
Senator Tkachuk: I'm not saying they do or don't or it's bad or isn't. I'm just saying they will make an - attempt to make a profit and a return on equity because their shareholders demand it. That's all I'm saying.
Mr. Sinclair: They will attempt to make a return on equity to their shareholders, yes, wherever it may be. Their greatest interests in managing a terminal is to reduce their cost of operating at that terminal.
Senator Tkachuk: Their own self-interest. Sorry.
Senator Gigantès: On a small point that has nothing to do with the issue, it's a personal point of comfort. Every day I've been here I've had a search light in my eyes. It hurts me.
Senator Lynch-Staunton: Change chairs. Go sit over there.
Senator Gigantès: They changed it yesterday, and then - no, no.
Senator Lynch-Staunton: Sit on the side of reason.
Senator Gigantès: I don't want anybody on TV to look and think that I belong to your party.
Senator LeBreton: We wouldn't either.
Senator Gigantès: There you are. We are in unanimous agreement. Could we see if the lights could be so fixed that we don't have to wear glasses to sit here? You don't have a light in your eyes, Mr. Chairman. They don't have a light in their eyes.
Senator LeBreton: I do. That one right there.
Senator Gigantès: You're not looking that way.
Senator LeBreton: I'm looking that way all the time.
Senator Tkachuk: It may be a problem, and there are lights everywhere, senator, but I think if you sat over there, you probably wouldn't have that light.
Senator Lynch-Staunton: Maybe in the next room.
Senator Tkachuk: We're surrounded.
The Chairman: Senator, your point is very well taken, and I will devote all of my time to getting it fixed.
Senator Gigantès: I am so grateful to you, sir. I thought, with your well known generosity and gentlemanliness, you would do no less than answer as you did.
The Chairman: Thank you.
Senator LeBreton: I have not finished yet. I had one more question. I was going to facetiously suggest that if you're going to do that, maybe we could get cool bulbs too, if we're going to get that ridiculous.
I have one last question, Mr. Sinclair, and I will refer to a letter. It's Document 00224. It's dated September 20, 1991. It's written by yourself to Huguette Labelle, then Deputy Minister of Transport, signed Gordon. Have you got the letter, Mr. Sinclair?
Senator Hervieux-Payette: We don't have it.
Senator Kirby: Is it one of the ones I referred to?
Senator LeBreton: No, it's not.
Senator Hervieux-Payette: May we have a copy of it?
Senator LeBreton: It's in the package.
Senator Lynch-Staunton: They don't have it. It came through normal channels.
Senator LeBreton: I actually have an extra copy.
Senator Kirby: Just as a matter of comment, we have generally - I'm not complaining about it. We've gone out of our way trying to try to do that.
Senator LeBreton: You have considerably more staff than I do.
Senator Kirby: I don't think that's true. I think all senators are the same. Anyway, doesn't matter.
Senator LeBreton: Doesn't matter. It's in our documents.
Senator Hervieux-Payette: You raised that question with me first last time. So I mean, I think I'm entitled to have the same reciprocity.
Senator LeBreton: I actually have an extra copy.
Senator Kirby: Go ahead and use it.
Senator LeBreton: Now I know how Marcia Clarke feels. Oh, dear.
Senator Gigantès: Who is Marcia Clarke?
Senator LeBreton: If you don't know who Marcia Clarke is. She is a woman hero of mine. Anyhow -
Senator Jessiman: She's a prosecutor.
Senator Kirby: We have half an hour left.
Senator LeBreton: In this letter, you are suggesting that the airlines get involved in the financing of runway construction at Pearson, a position I find somewhat disingenuous, but on the letter there is an obviously a little handwritten note. I will try to read it, although the last word is not clear:
Victor -
Obviously meaning, I suppose, Victor Barbeau, the ADM (airports).
- at first blush, this is no different from the airline consortium proposal of 2 years ago that was rejected in the first -
and I don't know what that word is, as I just mentioned.
I should like your comments on this letter. Number one, was it ever responded to officially? My direct question is, is it not your position, as head of this lobby group - this is how I read it - let us do the work, preclude everyone else? In other words, if the RFP process had made it clear that airlines or groups of airlines could bid or bid on a priority basis, your organization would have supported the modernization of Pearson?
First of all, did you get an answer to the letter officially from the Department of Transport?
Mr. Sinclair: I don't recall offhand if we did. The problem of the time was in addressing the opportunities for financing runway development at Pearson in a period of constricted resources, and, as you know, government accounting requires that expenditures are shown as expenses in the year in which they are incurred, unlike private industry. There was some problem with whether or not Transport Canada could sustain that kind of thing. The industry was willing to look at opportunities for private financing of the runway development as a possible option, if government could not do it in the traditional way.
I take that, and I suggest you can take that, as the evidence of the industry's conviction that runway development at Pearson was in fact required, and that was the evidence of the industry's commitment to support that project. That project was initially started way back in 1989 as a result of representations by ourselves and some recognition by Transport Canada that runway development was needed, and I regard that experience as one of the better examples of government/industry cooperation in a major capital project. When it came down to the point where government was having difficulties financing the scope of that kind of thing, then we were ready to provide alternatives, working with government, to make it come to pass, because we believed in the project.
Senator LeBreton: So if they had have responded favourably to this, my specific question is, would have your organization supported the modernization of T1 and T2?
Mr. Sinclair: We were not seized with the necessity for T1 or T2 at that point in time. There were other options that could be explored. What we wished is that the same kind of consultative process that was used with respect to runway development could and should also be used with respect to terminal development.
Senator LeBreton: When you say you weren't seized with the issue of T1 and T2, were the airlines not concerned, specially those that were in Terminal 1, about the conditions that they were working in and around? With no cars that could get into the parking garage? Did your organization not have a concern about that?
Mr. Sinclair: In the middle '80s, yes, there was a concern with T1 specially, which was substantially overcrowded. With the coming on stream of T3 in 1991, that substantially alleviated that problem. And instead of T1 being horribly overcrowded, as it was prior to that point in time, T1 was actually operating at less than its rated capacity, which was substantially less again than what it had been operating at.
So with the opening of T3, and at a level that was less than anticipated when the T3 project was commissioned, and with the uncertainty that existed in 1991 with respect to the economy as a whole, it seemed to us that a rush to provide terminal capacity at that point in time, other than the areas where Air Canada was having problems in T2 and had advanced certain projects, was in our opinion premature and that sufficient other options had not been explored. I'm sure you will recall one of the other options is a further expansion of T3. There is also the possibility of expansion into the infield, into a T4, if you will, which was not encouraged by Transport Canada at that time but which was definitely in the longer-term horizon.
Senator LeBreton: I think, though, you talk about the capacity. The object of the exercise for T1 and T2 was the modernization of the terminals. We've had many witnesses say the increased capacity was not the prime focus. Would you not agree that although you say T1 is under its capacity in its present state, it can handle about all the capacity it can at the present time?
I mean, I think this was always a confusion. We were talking about the modernization of two buildings at that time, although it might have been a subsidiary bonus. But I can't believe that your membership, two main groups being Canadian Airlines International who therefore had their problem solved, I agree, with T3, would not have, to your association, been expressing grave concerns about the conditions of the terminals.
Mr. Sinclair: Air Canada, as the tenant in T2, had their own game plan as to terminal development in T2, as they should have, being by far, you know, an 85 per cent plus tenant in T2. T1 was certainly an antiquated terminal, but three of the major carriers that were in T1 didn't want anything done at that particular time until they were more sure of where the economy was going.
Senator LeBreton: Rather short-sighted.
Mr. Sinclair: You can argue that, but I think they wanted a little more certainty in where things were going. There were certain signs of cutbacks. When they were in the latter part of '91, there was substantial uncertainty about the economy as a whole. People were - and some of my letters indicated that we wanted a little bit more time to go past at least till we saw what was going to develop, because we could see certain changes taking place. There was also some substantial difference of viewpoints as to whether it's better to renovate T1 or to tear it down and start all over again. There were people on both sides of that issue.
So there was substantial uncertainty that had to be addressed and factually evaluated against a good projection of the future horizon. There was a great deal of uncertainty at that point in time. People were unwilling to commit long-term. There was a substantial potential realignment in the Canadian industry. Even Canadian Airlines International was in some difficulty at that point in time and going through a difficult process. There was just a lot of uncertainty, and to commit to 700 plus million dollars of terminal redevelopment at that point in time -
Senator LeBreton: Here we are now in 1995, and, as Air Canada testified yet, it's unfortunate that the renovations were not - the work wasn't done in 1993, which supports the idea that airport development should be always on the long range, not responding to the ebb and flow of the economy.
Mr. Sinclair: I would agree with that, senator. But at that point in time, in 1991, there was a lot of uncertainty in everybody's mind. Certainly Air Canada had a reasonable vision of where they wanted T2 to go, and there had been substantial redevelopment of T2. Their concerns were in the international and transborder areas, and legitimately so. But that, you know, was an issue that they were prepared to work out with Transport Canada. And I would go back to 1989 and say that if there had been a more appropriate response to the initiatives at that time of having carriers privatize a terminal such as Air Canada with T2, then Air Canada would have been in a much better position as we went into the '90s.
Senator LeBreton: As an individual airline.
Mr. Sinclair: As an individual airline. And there is all kinds of arrangements that exist elsewhere in the world to look after the minority interests that were part of that terminal, but it would have provided a greater certainty as to the development of the terminal in response to the airline's perception of its future needs.
Mr. Nelligan: Mr. Sinclair, you had been asked earlier about correspondence that you had with the minister, and I'm more concerned to see that we got all the documents. Do you have a copy of the bundle of documents that were given to us?
Mr. Sinclair: Yes.
Mr. Nelligan: Immediately following your letter in September of 1991, there is a draft letter addressed to you which was apparently drafted for the minister's signature.
Mr. Sinclair: Yes.
Mr. Nelligan: You will find that as Document 00037. Apparently that was not sent, but if you would look then to Document 614, there is another draft dated the 11th of December, 1991.
Mr. Sinclair: I don't appear to have that.
Mr. Nelligan: Well, it is about -
Mr. Sinclair: Just a minute. I found it further down.
Mr. Nelligan: Fine. That's good. This is a memo on ministerial correspondence which says:
As we understand the Minister's Office returned the proposed response to Mr. Sinclair's letter of September 6 ... to be held until an RFP release decision is made.
So that makes it clear the earlier draft wasn't used. And it says:
... and as the subject of Mr. Sinclair's current and previous letters is very similar, we are proposing the following amalgamated response. Then it sets out a draft response.
Well, my question, sir, is, do you recall receiving a letter in the general terms of the draft response at any time?
Mr. Sinclair: No, sir, I do not.
Mr. Nelligan: But you did ultimately get a response?
Mr. Sinclair: Yes.
Mr. Nelligan: Do you know the date that you got it?
Mr. Sinclair: The response that I got, I believe, was in May. May 21, 1992 was the date of the minister's letter to me.
Mr. Nelligan: All right. That ties in with what he said about holding it until an RFP release decision was made. But you do not have a copy of that letter, sir? We don't appear to have it either.
Mr. Sinclair: Of the May 21 letter?
Mr. Nelligan: Yes. Is it in this material? I couldn't see it.
Mr. Sinclair: I have it here. I don't know whether it's in your material or not.
Mr. Nelligan: All right. Well, I would be grateful if you could give it to the clerk so I can have a copy made, because I would like to inquire why we didn't get that letter in the first place. Thank you. That was all I wanted to ask.
Senator Hervieux-Payette: Just a clarification: The letter that was referred to by Senator LeBreton, September 20, 1991 - there was a document attached to it called Runway Financing Proposal, Pearson International Airport. Can I call that document an unsolicited proposal to the Department of Transport?
Mr. Sinclair: Yes.
Senator Hervieux-Payette: Okay. You know, we talked about unsolicited proposals. This one has three pages. So it was a concept, an idea, that you were testing with the government at the time?
Mr. Sinclair: Yes, senator, it was. In terms of runway development at Toronto, our first preference was that it be done in the traditional way of government financing the runway and recovering through user charges. If that was not possible, then we preferred to go the route that we were indicating in that September letter, where the industry would form a consortium in consort with Transport Canada and work out a funding mechanism for the runway development.
Senator Gigantès: Runway development, not terminal development.
Mr. Sinclair: That is correct, senator, runway development.
Senator Hervieux-Payette: And this is in 1991. Am I right or correct in saying that this is the project now that is being executed at Pearson airport right now?
Mr. Sinclair: Yes, senator, it is.
Senator Hervieux-Payette: It is the project now that Air Canada referred to yesterday saying that it was causing some inconvenience because it would create delay? The new runway? Or was there other runway development since then? Because I'm just aware of one going on. It's not completed yet, I suppose.
Mr. Sinclair: Senator, it is my belief that what Air Canada may have been referring to yesterday was some repair and maintenance work being done at Pearson that required a closing of one of the runways for a period of time. That does not relate to what we were -
Senator Hervieux-Payette: The new runway?
Mr. Sinclair: It does not relate to that.
Senator Hervieux-Payette: Is this one functional now, to your knowledge?
Mr. Sinclair: The new runway?
Senator Hervieux-Payette: Yes.
Mr. Sinclair: No, not yet.
Senator Hervieux-Payette: And this project that you were promoting in 1991 was started when?
Mr. Sinclair: The project was started -
Senator Hervieux-Payette: Last year?
Mr. Sinclair: No, it would be in the fall of 1993.
Senator Hervieux-Payette: Okay. When it -
Senator Jessiman: Wasn't it cancelled?
Mr. Sinclair: No, it wasn't cancelled.
Senator Hervieux-Payette: It's in the traditional way.
Mr. Sinclair: It was done in the traditional way. There was some uncertainty when it started as to how it would be ultimately financed. That wasn't nailed down at that point in time but was to be worked out later. But it was started - if I can call it the hard project, it was started in the fall of 1993.
Senator Hervieux-Payette: And would you say that at this point in time, and I know you're not any more with the association, that this was the urgent problem to address in '91?
Mr. Sinclair: Yes.
Senator Hervieux-Payette: Okay. Thank you. It's still not been completed, but it's been going on now.
Senator Jessiman: Still?
Senator Hervieux-Payette: It's clear for me. And the other thing is that your letter of September 6, 1991, followed by your letter of March 25, 1992, prior to the RFP which was March 11, were you invited at any point in time to participate in either putting together the RFP or assisting or giving any of your expertise, the way you were doing it in the runway proposal?
Mr. Sinclair: No.
Senator Hervieux-Payette: Thank you.
Senator LeBreton: Point of clarification that I mentioned before I started to question the witness?
The Chairman: Okay. Short.
Senator LeBreton: Mr. Chairman and counsel, I'm addressing this to you. I had an opportunity to carefully look at the document 002191 which Senator Kirby referred to this morning, and of course it was a memorandum to the Prime Minister, marked "secret", March 5, 1993, and it was signed by Glen Shortliffe.
I have had a chance to look at it, and this is an entirely innocent and appropriate document. It is not offering advice. It is not drawing conclusions. It is simply reporting to the Prime Minister the state of a major government policy initiative. As I mentioned in earlier testimony, there were many such policy issues before the Prime Minister at the time: NAFTA, Nunuvat, anti-stalking legislation, and indeed, the fixed link to P.E.I.
As an aside, Senator Kirby, in an media scrum, said he thought it rather unusual that a Prime Minister be interested in a business transaction. This is more than a mere business transaction; it was a policy initiative of the government. I wonder, Senator Kirby, if Senator Kirby was in the Prime Minister's office when the matter of the Canadian embassy in Washington, which was in my view simply a business matter, when the Prime Minister intervened and the contract went to someone who was not the winning bidder, but that's an aside.
Like all memos of this nature, and Senator Kirby has seen many as well when he was in the Prime Minister's office, it was written by a bureaucrat, a person by the name of MacGillivray, and signed by the clerk, Mr. Shortliffe. As I have observed on many occasions, and I'm sure Senator Kirby has as well, because I was in the Prime Minister's Office, just like him, the clerk added a further note as a reminder to add some detail that he may believe is not covered in the memo as a result of conversations within the bureaucracy.
This memorandum is of interest because heretofore we have not seen documents from a Clerk of the Privy Council to the Prime Minister. Can counsel explain to the committee if this is unusual and why this and other documents of this nature are in our mountains of material? This is the first time we've had a secret memorandum from the Clerk to the Prime Minister.
Mr. Nelligan: Well, I think it's for the reasons that you already explained, that it wasn't confidential advice, and in addition, it's my understanding that the present Clerk of the Privy Council has apparently received some direction from the former Prime Minister to release all documents that are relevant, subject to the usual restrictions on cabinet secrecy and so on. So that I'm assuming that it came down in the normal way because it was felt to be relevant to this inquiry.
Senator Kirby: I don't have any difficulty with that. I just was going to say to the Chair, and I don't mind Senator LeBreton using this opportunity to rebut observations, but I understand her question about the document. I also agree with her that the document was a fairly normal document.
The only issue, I was asked - I didn't go looking for the press. I was asked in a scrum on the way out whether I found it unusual, and I said exactly, my words were, "Based my own experience, given all of the other pressures that a Prime Minister is under, I would found it surprising that the Prime Minister showed such extreme interest in this issue." That's what I said, and I stand by that. It was a personal opinion.
All I'm saying, Mr. Chairman, is if we're going to get into the business in this committee of using the committee to rebut what one member says outside of the testimony of the witnesses, then I guess we might as well set aside the last half hour of every session to do that. It doesn't seem to make a lot of sense.
Senator Lynch-Staunton: Your comment makes even less sense. Why should the Prime Minister not be interested in a job creation program which could lead to up to 15,000 jobs in the greater Toronto area at a time when unemployment was at an all-time high?
Senator Kirby: Senator, I'm sure you can justify without any difficulty why Mr. Mulroney was interested in it. I said I was asked whether I understood why he was interested in it, and I said no. I said that, based on my experience, it was highly unusual. That's all I said.
Senator LeBreton: What would you consider usual?
Senator Kirby: I understand you find it offensive, but the fact is, that's what I was asked and that's the answer I gave.
Senator Lynch-Staunton: I'm delighted that Prime Minister Mulroney was interested in it. I would have been appalled if he had not been interested in the project.
Senator LeBreton: Just as a matter that was just in today's paper, would you not consider it highly unusual that a senior member of the Prime Minister's staff goes and removes a net out of a pavilion of the Ottawa Exhibition?
The Chairman: I'm surprised the Prime Minister is showing such little interest that we only have one memo.
Senator Kirby: Mr. Chairman, we just don't know yet.
Senator Lynch-Staunton: Nobody was scandalized when Mr. Trudeau was interested in the Campeau development in Hull.
Senator LeBreton: Just for the record, we have this nice unusual circumstance of a memo to the Prime Minister because of the former Prime Minister's concurrence. Hopefully we will have the cooperation of the present Prime Minister.
The Chairman: I have a couple of quick announcements before we adjourn. We are adjourning now until Tuesday, the 22nd. Our first witnesses are from the Treasury Board. Mr. Ran Quayle has been added on the evening of Tuesday. Senator Kirby, you've kept up on all these changes?
Senator Kirby: Yes. We've discussed them, and that's fine. I know there has been moving around to accommodate witnesses, and that's fine.
The Chairman: Yesterday afternoon, Senator Kirby and I had quite a long meeting and have come to total agreement that because of the confusion and misunderstanding that has come up time and time again with regard to documents, the presence of counsel for the Department of Justice, the other people and so on, Senator Kirby and I have asked the counsel to this parliamentary committee to call a witness from the Department of Justice to go through this whole matter of exactly how they are proceeding, how the rights of a parliamentary committee reconcile with the actions of the departments who are involved. Senator Kirby and I are totally agreed, and Mr. Nelligan this afternoon will request that such a witness be called I hope sometime - well, certainly soon.
Senator Kirby: That's absolutely correct.
Senator LeBreton: Will that be the first week?
Senator Kirby: It depends on scheduling, but the answer is we will do it as we can fit it in. We agree absolutely.
The Chairman: This is important. If we do nothing else, we have to find out whether or not parliamentary committees have any authority.
Anything else?
Senator Kirby: Thank you, Mr. Chair.
The Chairman: The meeting is adjourned.
The committee adjourned until 3:00 p.m., August 22, 1995.