Past Session:

Proceedings of the Special Senate Committee on

Pearson Airport Agreements

Appendix

SUBMISSION BY GORDON R. BAKER TO THE SENATE COMMITTEE ON LEGAL AND CONSTITUTIONAL AFFAIRS RESPECTING BILL C-22 THE PEARSON INTERNATIONAL AIRPORT AGREEMENTS ACT AND PROPOSED AMENDMENTS

MARCH 28, 1995

INTRODUCTION

I<1> am making this submission on behalf of Matthews Investments<2>. My knowledge of the transaction arises as a result of my acting as counsel to Matthews Investments and to the Paxport Group with respect to negotiations with Claridge for the creation of the Partnerships for the ownership of Terminals 1, 2 and 3; with respect to the negotiations with Transport Canada with respect to the Airport Contracts; and as a director and member of the Management Committee of Pearson Development Corporation. Unlike Mr. Nixon's report I am providing hard evidence and independent reports and documentation to substantiate what is stated. If you want any additional documentation I will be pleased to provide it. Its time for the public to have full, true and plain disclosure of all the facts without material omissions. Its time for an open and honest assessment of what went on.

This submission seeks to address three basic questions:

(a) What was the process that led to selection of the winning proponent in the T1T2 RFP process; what were the basic elements of the contracts negotiated with the Government;

(b) What was the basis of the review conducted by Mr. Nixon; what did he and the Liberal government know about the selection process and the basic elements of the contracts; and what did Mr. Nixon say about the above in his Report?; and

(c) Given the information that was available to Mr. Nixon and the Government, and given the Government's policy and political goals, what are the objectives of Bill C-22?

Publicly available evidence establishes that prior to its election on October 26, 1993, the Liberal party and Jean Chrétien were well informed about the evolving airport policy for Lester B. Pearson International Airport. In fact, several Liberals including Mr. Chrétien, Mr. Mills and Mr. Manley had indicated to officers of Matthews Group Limited and/or Paxport Inc. that they were supportive of private involvement in the re-development of Pearson's Terminals 1 and 2.

In a surprising about face the Liberal's sought during the election campaign to gain maximum political advantage over the airport issue by characterizing in a negative way a transaction that they had heretofore ignored or quietly supported (Note: Chrétien, D. Mills, J. Manley). As the political advantage grew from attacking the transaction, so too did the vehemence of the Liberal assault. Never part of its formal election platform, the Liberals appear to have stumbled across what they perceived as a winning issue. This perception led candidate Chrétien to establish during the campaign a policy for T1T2 that centred around reviewing or cancelling the transaction. Given the premium that had been placed on keeping election promises, candidate Chrétien's election posturing regarding Pearson ultimately bound the Prime Minister Chrétien.

After victory, officials and outside consultants began advising the new government of the true facts behind the Pearson transaction. In that moment, reality met politics and the election issue that was too good to be true turned out to be -- too good to be true. As this document shows, the Government and Mr. Nixon were overwhelmed with facts and figures that established the transparency, propriety and economic benefits of the process and contracts negotiated between the Government and Pearson Development Corporation.

The evidence shows that the Nixon Report, Bill C-22 and the Government's subsequent actions have all been initiated to try to allow the Government to hide their political deceit behind the veil of negative public perception that they were able to create surrounding the Pearson transaction during the election campaign.

On May 31, 1994, both Donald J. Matthews and I attended and testified before the House of Commons Standing Committee on Transportation. Our testimony is recorded in Committee Hansard, and copies of our submissions and the exhibits are included herewith.<3> <4> At that time we rebutted every aspect of the Nixon Report. Despite the importance of Nixon's report to the government's decision to introduce Bill C-22, the Liberal members of the Transport Committee voted not to call Mr. Nixon to respond to the glaring inconsistencies and material omissions of his work.

At that time, I concluded as follows:

"In the final analysis, the Nixon Report contains a multitude of factual errors, incorrect statements and misrepresentations. Every negative statement and conclusion can be rebutted . . . it cannot be relied on as the basis for implementing legislation to deprive Canadians of their property and their right to go to court to protect their property and their reputations."

Since that time, I have received thousands of pages of information under the Access to Information Act, and I am still waiting to receive further information. I also had the benefit of the evidence adduced on a number of applications to the Ontario Court (General Division) including:

(a) an unsuccessful Stay Application by the Crown (Judgement dated November 10, 1994, Tab 12);

(b) a successful Application for Summary Judgment and a Motion by the Plaintiff (PDC) declaring that the Crown had created and repudiated the airport contracts. In that court case, the Crown made no allegations of impropriety, wrongdoing or unlawful actions of the Plaintiffs or anyone associated with them (Judgement dated January 16, 1995, Tab 13); and

(c) a motion by the Crown and unopposed the Plaintiffs declaring that the Plaintiffs have no registrable interest in the airport lands and ordering the Plaintiffs leases expunged or deleted (Judgement dated January 16, 1995, Tab 14).

As a result, I now have substantial evidence that was not available to me on May 31, 1994. This new evidence reinforces and demonstrates that the Government knew or ought to have known that the Nixon Report (Tab 2) upon its receipt on November 29, 1993 and as released on December 3, 1993, was so demonstrably wrong and misleading that it was unreasonable and unconscionable to release it.

Important new information includes:

(a) The Associate Deputy Minister W.A. Rowat's memorandum to Mr. Nixon dated November 1, 1993, listing T1T2 agreement documents submitted to Mr. Nixon (Tab 6b);<5>

(b) Submission by Transport Canada to Mr. Nixon entitled "Terminal 1/Terminal 2 Privatization, November 4, 1993" (Tab 10)<6> (herein referred to as the "Government Submission" or "Privatization");

(c) Note to Mr. Robert Nixon from Bill Rowat, dated November 8, 1993 re Pearson Development Corporation with regard to Pearson Airport monopoly on air traffic (Tab 6(f));

(d) Price Waterhouse Report dated the 8th day of July 1992 (Tab 6(c));

(e) Monitoring Activities Report, Raymond Chabot Martin Pare (Tab 6(d));

(f) Audit Activities Report, Raymond Chabot Martin Pare (Tab 6(e));

(g) The Crosbie Report (Tab 6(g));

(h) The Deloitte Touche Report (Tab 11).

These documents show that the Government had overwhelming, independent advice from Deloitte Touche, Price Waterhouse, D.S. Marcel, and indirectly from Wood Gundy, as well as the knowledge of its own Deputy Minister and other officials, and Transport's internal financial group that the Nixon Report was wrong with respect to the selection process, its analysis of the contracts, the financial aspects of the transaction and patronage. The Government knew or ought to have known that the Nixon Report could not be relied on for any purpose, let alone the justification of unprecedented draconian legislation in the nature of Bill C-22.

Bill C-22, is an attempt to legalize, what might be characterized as "theft by the Crown", and to provide immunity for those involved, including protection for defamation. Not since Roncarelli and Duplesis in Quebec has the Canadian public seen such arbitrary and vindictive oppression of Canadians by their government. The Government's conduct is an amazing example of wanton disregard of civil and constitutional rights of Canadians in an attempt to legitimize its politically motivated unlawful acts.

It is important for Canadians to understand and appreciate that none of this evidence would have come to light or have been of any benefit if Bill C-22 had been passed. Bill C-22 denied the right to sue and the right to damages. Bill C-22 provides immunity to all involved.

Today, I would like to deal with Bill C-22 in the following way:

A. a follow up review of significant issues raised in the Nixon Report to demonstrate that there is no merit in or moral or legal justification for passing Bill C-22 or any similar legislation which would diminish in any way the rights and remedies of Canadian companies or individuals based on the Nixon Report. The facts will show there was no justification for cancelling what was an excellent deal for all the stakeholders at Pearson Terminals 1 & 2; and

B. my conclusions and recommendations to this Committee.

A NIXON REPORT

I will now deal only with new information relating to some of the major issues raised in the Nixon Report, as follows:

I. FINANCEABILITY

Issue:Protection for the Crown.

Mr. Nixon claims "the selection of a "best overall acceptable proposal" without complete assurance of financial viability seems to me to have been highly unusual and unwise". (Tab 2, p.8).

Although critical of the financial aspects of the transaction, Mr. Nixon failed to state

1. The December 3, 1992 letter from Victor Barbeau notifying Paxport that its proposal was "the best overall proposal" and that the Government would enter into negotiations contained a condition that Paxport "demonstrate to the satisfaction of the Government by February 15, 1993 that the proposal was financeable". A material omission on Mr. Nixon's part (Tab 12, p.13).

2. Deloitte Touche were retained by the Department of Transport in January, 1993 to assess the Paxport Proposal's financeability and that Deloitte Touche were satisfied as to the financeability of the project. Mr. Nixon was briefed by the Deputy Minister, William Rowat, to that effect (Privatization, Tab 10, page.13). Deloitte Touche<7> specifically states, "In our view, the transaction as presented in the 7-23-93 financial projections of Mergeco is financeable".

Nowhere in Mr. Nixon's report does he indicate why he disregarded Mr. Rowat's briefing or the Deloitte Touche report. Nor does Mr. Nixon state that Deloitte Touche stated that, ", we feel based on the 25%-75% split as contemplated in Mergeco's proposal, particularly in initial years, the transaction will be readily financed in Phase 1 and 2 as contemplated in the projections."

II. FINANCIAL ASPECTS OF THE TRANSACTION

Issue: Mr. Nixon singled out specific aspects of the transaction for criticism.

Mr. Nixon states as follows:

(a) "In the calculation of gross revenue (on which rent will be based), there are 10 deductions which I am advised are unusual in commercial transactions." (page 5 - Nixon Report, Tab 2).

(b) "The revenue stream provided the Government of Canada by this agreement is far from overwhelming. In the immediate term, the rentals received will in fact be less than in recent years."(page 11 - Nixon Report, Tab 2).

(c) ". . . the rate of return provided to T1T2 Limited Partnership could, given the nature of this transaction, well be viewed as excessive." (page 11 - Nixon Report, Tab 2).

The allegations in the foregoing statements are all false or misleading and I will address each in order.

Deductions

(a) I addressed this issue in My Statement (Tab 3, page 20). The deductions in determining gross revenue are usual in commercial transactions and have only been adapted to the particularities of this transaction. Mr. Nixon should have reviewed the local airport authorities leases for comparison and enlightenment.

(b) Revenue Stream

[Note: Revenue stream was critical to establishing a view on whether the Crown was protected under the transaction and whether they were better off versus some other option.]

Nixon is factually wrong with regards to rentals and revenue stream. Rentals under the Leases are in fact higher than in recent years. Mr. Nixon, in comparing the rents from Terminals 1 and 2 to the Lease, used erroneously the total rentals on the airport including the cargo terminals and Terminal 3 (see the schedules to the Nixon Report entitled "Pearson International Airport" he was using the whole airport, not just Terminals 1 and 2. He was comparing the whole pie to a slice). Net rent from Terminals 1 and 2 in 1993 was $23.6 million.<8> The proposed base rent at the commencement of the Leases was $28 million with various escalations. (Mr. Nixon stated rent was $27 million but missed the utility building lease for $1 million.)

The estimated total revenue stream to the Government of Canada over the period is $8 billion, with additional total federal and provincial taxes of $3.8 billion.

[Note: Return is critical in evaluating bids and reinforcing wisdom of privatization policy. Was the return fair market value? Was it higher than the estimates of the Government's independent evaluators? Was it higher than the Claridge Proposal?]

i. Price Waterhouse prepared a report for the government (Tab 6(c)) to provide a baseline valuation to the Government for the purpose of evaluating the proposals for the privatization of Terminals 1 and 2. In that report, Price Waterhouse estimated that the fair market value ranged from a low of $342 million to a high value of $561 million (i.e. expected return to the Government).

ii. Transport Canada's calculation of the return to the Crown (based on the PDC Lease) is $843 million<9>.

iii. The soundness of the transaction and accuracy of Transport Canada's analysis was confirmed by Deloitte Touch. The Deloitte Touche Report (Tab 11), concludes "keeping in mind that there an upside in terms of the Crown's return, we feel a net present value of [PDC's] the ground lease of between $800 million and $900 million is fair market value consideration to the Crown".<10>

Transport Canada's return of $843 million is 150% higher than Price Waterhouse's highest estimated return. Deloitte Touche's estimation ranges from 143% to 160% higher. It is quite obvious this was an excellent deal for the Crown and taxpayers based on the Crown's own and its independent advisors' analysis.

Nevertheless, Nixon chose to ignore the nine months of analysis that went into establishing the accuracy of these calculations. Instead, Nixon sought the advice from someone unfamiliar with the transaction (the Crosbie Report) - Tab 6(g)) and then used that advice selectively to create the impression that the transaction was overly generous to the developers.

To illustrate how Nixon used the advice he received selectively, a brief review of the Crosbie report is instructive.

The Crosbie report stated:

"Based on utility returns, the projected returns on equity would appear to be within the range of reasonable returns, but at the high end of the range. If on the other hand, one were to compare the projected investor returns to that of an income-producing real estate investment or the returns that may be inherent in Terminal 3, the returns could well appear to be in excess of that required in today's market."

What the Nixon Report failed to reveal were the underlying assumptions for this statement and his statement above.

The interest rate assumption directly affects the ultimate return or value. The higher the interest rate cost to the redevelopment project, the lower the rate of return for both Pearson Development Corporation (also referred to as Mergeco) and the Government.

The Crosbie Report assumed an interest rate on debt of 8.5% on borrowings of $484 million (page 5). The interest rate assumed by Pearson Development Corporation on long-term debt and accepted by the Government of Canada was 10.5%. The interest rate assumed by Price Waterhouse was 10%.<11>

Deloitte Touche states, "based on discussions with Wood Gundy and others, it would appear reasonable to assume that a difference in the cost of borrowing where the Crown is the principal versus Mergeco would be in the neighbourhood of 200 basis points".

D.S. Marcel indicated that the spread in real estate returns versus Canada Bonds was approximately 385 basis points (page 4, Deloitte Touche Report).

Price Waterhouse advised Transport Canada, "long term financing would be available at approximately 200 basis points over the Government of Canada 10-year bond rate". Mr. Nixon had this report.

In the spring of 1993, the 20-year Government of Canada bonds were yielding approximately 8.3% and therefore Mergeco's interest cost would be at approximately 10.3% (Deloitte Touche Report, page 4). Deloitte Touche concludes, on page 8, "an after-tax rate of 12-16% is reasonable". Mergeco's rate of return was 14%.<12>

Based on D.S. Marcel's advice to the Government, the interest rate used to come to their conclusion with respect to return on investment on a realty project basis should have been 12.15%, not 8.5% (on the $484 million of borrowing).

Mr. Nixon was briefed by Transport that "PDC return on investment reduced to 14% endorsed as reasonable rate of return by both Department of Finance and independent financial consultant".

(underlining for emphasis)

Perhaps the most telling part of the Crosbie Report are the qualifications at page 6,

"Because of the limited scope of our engagement, it was not practical to speak with potential real estate equity investors to ascertain the kinds of returns that they would think would be reasonable in a project with these characteristics". Further, "based on the above analysis and our understanding of the project within the scope of our engagement our preliminary sense would be that from a real estate investment point of view, the projected rate of return . . . could well be in excess of that required in the marketplace".

(Underlining for emphasis.)

Mr. Nixon never offered these qualifications which materially affect the credibility of the statements in this report. Furthermore, in light of the Deloitte Touche and Price Waterhouse and Transport Canada reports and analyses which were available to Nixon, the Crosbie analysis and "preliminary sense" were totally discredited and should have been discarded. The question is why did Nixon feel compelled to retain Alan Crosbie and then provide him with such a limited scope of investigation? Were Nixon and the Government merely seeking half truths to half-asked questions? Or did Mr. Nixon, a former Treasurer of the Province of Ontario, simply not understand the issue?

Contrast that to the professionalism of the Deloitte Touche analysis over 9 months, the hastily done Crosbie Report should have been considered unhelpful and inconsequential, yet it was used by Nixon, as part of the justification by Nixon for cancelling a mega project.

To summarize the foregoing, the Government received "fair market value" and the return to the Partnership was "reasonable".

Treasury Board and Cabinet Approval

Issue: Nixon implies that the transaction was done by Prime Ministerial discretion without proper treasury board or cabinet approval during the election campaign.

What needs to be established is: what is the legal process and was it complied with?

Mr. Nixon refers to the June 18, 1993 non-binding letter of understanding and refers to an August 30, 1993 announcement made by the Minister of Transport that a general agreement had been reached with Pearson Development Corporation and that, "this agreement would be finalized in the fall with a legal agreement for long-term management operation and redevelopment of the Terminals".

Mr. Nixon states, "Finally, the concluding of the transaction at Prime Ministerial discretion in the midst of an election campaign where this issue was controversial, in my view flies in the face of normal and honourable democratic practice. . . . It is a well known and carefully observed tradition that when governments dissolve Parliament they must accept restricted power of decision during the election".

Nixon, however, was briefed by Transport Canada as follows:

"Non-binding letter of intent signed June 18, 1993 by Deputy Minister of Transport, H. Labelle, and Paxport and Claridge (T1T2LP) agreeing that the drafting of final documentation would continue and the government would seek the approval of the Treasury Board and Governor in Council of the final documents." (Tab 10, page 13)

"Treasury Board Submission Approval August 27, 1993" (Tab 10, page 13)

"August 27, 1993 Treasury Board Approval and Orders-in-Council Approving T1T2 Lease Agreements" (Tab 10, Page 10)

"Treasury Board authorizes the Transport Minister to enter into the following agreements with Pearson Development Corporation:

i. Lease;

ii. Option to Lease;

iii. Development Agreement;

iv. Employee Transfer Agreement

v. Management Services Agreement;

vi. Bill of Sale (Chattels and Consumables)"<13>

Comment: The principal agreements had been finalized and submitted for the Treasury Board for its approval prior to August 27 and approved on August 27, 1993. Cabinet Order-in-Council was passed on the same day. Mr. Nixon knew but did not reveal those two significant material facts to the Canadian public. The election was called in September. Mr. Nixon could only make his statement by leaving out those two material facts. Furthermore, testimony by the foremost constitutional expert Professor Heard in this area before your committee or December 8, 1994 establishes contrary to Mr. Nixon that there is no such "tradition" as he asserts. Professor Heard stated "The legal authority of the Governor General is exercised in practice on the binding advise of a cabinet who can command a majority of seats in the House of Commons, this is the essence of responsible government."

To quote the Right Honourable Jean Chrétien (Prime Minister) (with respect to another financial obligation of the Crown - the reimbursement of the Province of Quebec for its Meech Lake Accord Referendum costs), "Mr. Speaker, a Prime Minister cannot act alone. The Opposition would be the first to blame me if I took on financial commitments without Cabinet and Treasury Board approval. Of course, if I give my word, they will honour it; on the other hand, legally, without a Cabinet decision and Treasury Board approval, there can be no government commitment." (Hansard, Page 6255, September 28, 1994). In the case of the PDC contracts all these elements clearly existed. [I would also note that the Province of Quebec was finally reimbursed but only because of the efforts of the Bloc Québecquois in the House of Commons.]

As I have previously stated to the House of Commons Transport Committee on May 31, 1993, on August 27, 1993 there was a legally binding agreement between PDC and the Crown. The Prime Minister obviously agrees with me. The legal process was complied with.

A simple analogy as to what was done here would be the settling of an Agreement of Purchase and Sale for a house between a buyer and seller with the closing at a later date. Most Canadians would understand that you just cannot walk away from the closing because a neighbour is yelling obscenities.

Selection Process

Issue: Was the selection process fair and transparent; was the winner selected on the basis of offering the best deal to the Government; or was patronage behind the selection?

While Mr. Nixon criticized the RFP process, he omits in his Report any reference to the briefing by Transport Canada that completely validates the selection process<14> including the reports of independent process auditors. Below is a list of specific issues identified by Nixon which were used to question the benefits of the transaction:.<15>

Passenger Facility Thresholds

Issue: Does the Pearson Contract constrain other airport development?

I have addressed this issue at page 5 of my memorandum (Tab 5). Suffice it to say that, although Mr. Nixon suggested the 75 kilometre radius constraint on alternate airport development. "may well constrain desirable policy issues on the part of the Government" he omitted to state that all local airport authority leases to date prohibit competition by the Crown within 75 kilometres of the airport and unlike the Pearson lease the CAAs have no criteria as to traffic levels which would resolve this issue. The CAAs have a total prohibition.<16>

An even more material omission however was the failure to disclose Bill Rowat's (the Associate Deputy Minister) briefing note of November 8<17> which concludes:

"In summary there is nothing in the redevelopment agreement for Pearson which adversely affects the obligations of Hamilton to fulfill its role in the Southern Ontario Airports system"

Need anything further be said!

"INADEQUATE CONTRACT"

Issue: Was there anything materially deficient in the contracts?

Mr. Nixon states at page 13 that the Airport Contracts were inadequate. Mr. Desmarais, the Crown witness in the litigation, under oath, was asked if in his view these were not inadequate contracts. He stated,

"At the time of closing, that is what I believed. I believed that they were not inadequate."

Question: "And that is still your belief?"

" I have come to the conclusion over time that there are a couple of clauses I would love to renegotiate. However, they are still within the overall view acceptable."

In relation to the question of adequacy, Mr. Sgayias, counsel for the Crown, stated,<18>

"I am wondering about relevance here. The Crown is raising no defence as to the adequacy of the contracts or offering any basis, contractual or otherwise, for repudiating the contracts."

What is most informative on this issue however is Transport Canada's analysis for Nixon of the amount of leeway available to renegotiate the Contracts (tab 10, page 29 and 30). Read and consider them. This analysis effectively rebuts Nixon's contentions. There were no material changes that could be accomplished. Nixon was told "there was no room to increase the ground rent for the government significantly ". And of course there was the political problem which was created by the Liberals during the election and that could not be addressed in a renegotiation, i.e., the public might realize that this was not such a "bad deal" and it wasn't "patronage".

Non-Arms Length Contracts

Issue: Were these contracts fair and competitive.

Mr. Nixon also raised a number of issues about non-arm's length contracts. I have previously dealt with those issues in My Statement, Tab 3(1) at page 27. However, Mr. Desmarais on cross-examination stated that there was no requirement for approval of the non-arm's length contracts (Tab 7, page 29). Non-arm's length contracts were to be on "commercial terms, commercially equivalent terms" (Tab 7, page 31). In discussing the Allders' duty-free contract, which is the most significant non-arm's length contract, Mr. Desmarais testified that the Government's acting director of retail operations had reviewed the Allders contract. Her report concluded that the Allders contract was, "much more stringent than any lease the Department has with any concessionaire". Mr. Desmarais, on behalf of the Government, was, "then satisfied about the reasonableness of the Allders lease" (Tab 7, page 35).

PATRONAGE

Issue:What is patronage? Is there any evidence of patronage? Does the evidence support the opposite conclusion?

Mr. Nixon's comments on patronage must be taken in the context that his instructions are and still remain secret and in light of his own policy opinions (without any analysis to support them). Nixon states:

(a) Privatization of Terminals 1 and 2, "is inconsistent with the major thrust of the policy of the Government of Canada announced in 1987". (Tab 2, page 8)

(b) "The concluding of this transaction at Prime Ministerial discretion in the midst of an election campaign where this issue was controversial, in my view flies in the face of normal and honourable democratic practice. It is a well-known and carefully observed tradition that when government dissolve Parliament they must accept a restricted power of decision during the election period. Certainly closing the transaction, of a transaction with such significant financial importance, sealing for 57 years the privatization of a major public asset should not have been entered into during an election campaign." (Tab 2, page 8).

(c) Under the heading, "The Politics of the Process", he refers to Mr. Donald Matthews and Mr. Otto Jelinek (neither of whom did he meet) and states, "This, together with the flawed process I have described, understandably may leave one with the suspicion that patronage had a role in the selection of Paxport Inc." (Tab 2. page 9)

Mr. Nixon suggests that a government cannot change policy -- an interesting but obviously erroneous proposition. With respect to paragraphs (a) and (b), Mr. Nixon failed to disclose in his chronology two significant dates and issues on which he was briefed:

August 18, 1989 - Airports in Southern Ontario - "A Strategy for the Future" - LBPIA to be Developed to its Optimum Capacity; and<19>
August 27, 1993 - Treasury Board approvals and Orders-in-Council granting authority to enter into T1T2 lease arrangements.<20>

Transport Canada briefings to Mr. Nixon, which establish the airport transaction as completely consistent with government policy, completely contradict the statements in his Report.

Mr. Nixon does not reconcile the inconsistency of his statement with the fact that the Government had privatized Terminal 3 prior to the announcement of a proposal for private sector participation in T1T2 on October 17, 1990 and the request for proposals on March 12, 1992.

With respect to paragraph (b) above, Professor Heard, the leading authority on constitutional convention and tradition, has testified before the Legal and Constitutional Affairs Committee of the Senate that there is no such convention as referred to by Mr. Nixon.

Furthermore, Mr. Nixon failed to disclose, as he had been briefed, that the Treasury Board approved the entering into of the lease, the option to lease, the development agreement, the employee transfer agreement, the management services agreement and bill of sale as submitted to the Treasury Board on August 27, 1993. Orders-in-Council approving the transaction were also passed on August 27, 1993. Mr. Nixon's statement therefore is at least misleading if not false.

With respect to paragraph (c) above, I have previously dealt with Nixon's mischaracterization and description of Mr. Donald Matthews and Mr. Jelinek.<21>

Perhaps the most telling material omission from Mr. Nixon's Report regarding patronage is the table which he received as evidence about the relative merits of the two competing proposals. The table sets out the highlights of the two competing proposals -- Paxport and ATDG (the Claridge Group) as follows:

"HIGHLIGHTS OF PROPOSALS

Original Proposals<22>

	Paxport	ATDG
Partners	Matthews group	Claridge Group
	AGRA	Lockheed
	Bracknell
Development Plan
- Equity	$106.5M	$227.5M
- Debt	$618.0M	$530.7M
- Cash Flow	$133.5M
	_________	__________
TOTAL	$858.0M	$758.12M
Return to Crown	$1,245M	$642.0M
n.p.v. @ 8.5% (57 years)

The return to the Crown under the Paxport Proposal was almost twice as much as the ATDG bid. $1,246,000,000 versus $642,000,000, respectively. A $604 million positive difference! A 194% difference!

"Patronage" is defined in Webster's Ninth New College Dictionary as follows:

"Patronage" - the support or influence of a patron . . . business or activity provided by patrons . . . the power to make appointments to government jobs esp. for political advantage . . . the distribution of jobs on the basis of patronage.

Webster's American New World Dictionary defines patronage as the "granting of favours, especially political ones".

It is impossible to understand how Mr. Nixon could fail to advise of the comparison of the two proposals and the magnitude of the difference. Nixon makes a very curious statement in his Report:.<18>

"Claridge, whose bid provided a lower return to the Government of Canada.... found itself, after losing the bid, forced to accept a less advantageous position save the Paxport bid."

Not only is this an admission that the Paxport bid was better but it implies to me that taxpayers should have accepted less from Claridge rather than have Claridge have to pay more to the taxpayer as a result of joining with Paxport.

Now Mr. Nixon says "Paxport won the bid, so it was better". Nixon said, "I would simply say you are missing several nuances that it is not appropriate for me to talk about in detail...".<19>

Not even in general? Is $604 million a nuance for Mr. Nixon?

There is not a shred of evidence in the Nixon report or in anything produced by the Government to support Mr. Nixon's statement that this would "leave one with the suspicion that patronage had a role in the selection of Paxport Inc."

I would also point out that Mr. Nixon totally ignored information provided on the request for proposal process,<20> and the independent reports.<21> The Reports I am referring to are the Price Waterhouse Report; the Process Monitoring and Consultant Report; and the Process Audit Report. Nor did he report that there were four independent members of the Evaluation Committee from outside the government.

Nixon's allegations are ludicrous in light of the facts.

The final negotiations<22> resulted in a reduced return to the Crown of $843 million. As indicated in the Transport Submission, this came as a result of negotiations balancing the return to the Crown, airline rents, return to PDC and airport competitiveness. This resulted in negotiations with:

(a) the Crown giving 15% rebates to airlines on ground rent,

(b) PDC introducing a 10% profit rebate to airlines and a reduction of 1.5% in capitalization factor, and

(c) constraining rents, so increases to airlines would be in line with T3 rates. The Pearson Development Corporation return on investment decreased to 14% which was endorsed as a reasonable rate of return by both the Department of Finance and independent financial consultants (Tab 10, page 17).

The reason for the reduction in return to the Crown and this balancing of negotiations is alluded to on page 18 of the Transport Submission (Tab 10) under the heading "Air Canada":

"Air Canada

-- 1989 TC Letter to Air Canada (the "Guiding Principles") indicated TC willing to renegotiate Air Canada lease for 40 years after expiry of current lease in 1997, in return for:

(1) moving some flights to Hamilton

(2) providing investment in T2 (approximately $65 million).

-- Legal opinion was that the letter could be binding.

-- Negotiations with Air Canada led to the acknowledgement that in signing a new lease with PDC, effective on closing, the Guiding Principles letter would be null and void.

-- For the project to proceed it is important that Air Canada, as largest tenant, reach an agreement with the developer. They were not prepared to sign on unless both Government and PDC reduced expectations, with the government taking a reduction in ground rent, and PDC sharing profits with airlines."

What is not stated is that the Request for Proposals issued on March 12, 1992 stated that the Air Canada lease expired in 1997. During the negotiations with Transport Canada after the December 7, 1992 announcement of Paxport as "having the best overall proposal", the fact of the 40-year extension was never revealed until the June 16, 1993 letter of Huguette Labelle, Deputy Minister of Transport to Jack Matthews and Peter Coughlin. Material misrepresentation in the Request for Proposals and the delay in disclosure resulted in delaying the original May 1993 schedule for documentation until August 1993.

Mr. Nixon also omitted to disclose in his discussion of alternatives to privatization that the Crown construct option was of significantly less value i.e. $595 million.

In the end result the final deal (controlled by the Claridge Group as to 65.71% and the Conservative Don Matthews having beneficial interests in only 18%) was a substantially better financial deal for the government and taxpayers than the original Claridge proposal by 131% even after the concessions made to Air Canada.

Cancellation of the Deal

Mr. Chrétien stated during the election campaign that there would be an "independent review". However, Transport Canada advised Mr. Nixon that there were only two options as to the possible outcome of the review:

"POSSIBLE OUTCOME OF REVIEW

1) Cancel the deal;

2) Negotiating/Restructuring the Deal."<23>

Honouring the deal was obviously not one of the options under consideration. One is lead to the inescapable conclusion that the "review" had a predetermined objective.

Mr. Nixon was advised that cancellation or a negotiated settlement could result in considerations included damages in the range of $500 million to $2 billion as follows. Negotiation would not dispel patronage charges.

"PDC could seek damages in $500M to $2B range for lost profits and other damages (monies expended to date, consequential third party damages, etc.)"

"Punitive damages could be assessed if it was determined that the government acted in an unreasonable manner (legislation is not necessarily unreasonable)".

"If expropriation took place, compensation would be determined on the basis of "fair market value" (lost net revenues would be in the same range as above)".

Nixon was also advised that in the case of a negotiated settlement that it "Does not dispel patronage charges" and "Public perception of a "bad" deal may be dispelled".

The Government also recognized and advised Nixon that legislation "could undermine the Government's contract and leasing process if seen as a precedent".

In court the Government made not one allegation of wrong doing, impropriety or unlawful or fraudulent action on the part of the Plaintiffs or anyone associated with them. There was no defense offered at all for the Government's conduct in cancelling the Air Canada Contracts. It is obvious that the Government was not acting reasonably but arbitrarily and without justification. The judgments are at Tabs 12 and 13.

The Government had to have known from the outset that the Nixon Report would not be justified if the facts ever saw the "light of day" given all of the material omissions and misrepresentations. The Government acted in an unreasonable manner in releasing the Nixon Report and subsequently supporting it and using it as the moral justification for Bill C-22.

Transport's second option, renegotiating/restructuring a deal, contemplated that the threat of legislation or expropriation would coerce the Pearson Development Corporation into negotiating (Tab 10, page 29). However, by Transport's own analysis (Tab 10, page 29) there really was no basis for renegotiation. The deal already was too good for the Government as there was nothing alone or in aggregate that would be significant enough to dispel the Liberal created public perception of "bad deal" and "patronage issue". Both allegations were false based on all the evidence available.

The Transport analysis of the renegotiate/restructure option is a complete rebuttal of a number of Nixon's criticisms of the deal and a total rebuttal of his statement that this was "an inadequate contract". Similarly the Transport Canada briefing on the process completely rebuts Nixon's conclusion that the contracts "were arrived at with such a flawed process and under the shadow of possible political manipulation". Nixon states "I recommend to you that the contract be cancelled". What hypocrisy!

Summary

(a) The facts and information provided demonstrate, without question, the analysis, criticism and conclusions in the Nixon Report are wrong.

(b) The Transport evidence shows that the selection process was tightly controlled and monitored by independent outside experts, the Government's financial advisors were independent outside experts, and the Selection Committee also included outside independent members.

(d) Mr. Nixon's analysis of the financial aspects are deliberately simplistic and unsupportable.

(e) The deal was an excellent deal for the Government of Canada, the airlines (in particular Air Canada), the travelling public, and for Ontario in respect of jobs and economic activity. Approximately 4,200 people would have been employed today, and already $100 million in investment would have spent.

(f) The Government would have earned more than 80% of the revenue value of Terminals 1 and 2 through the Lease and the Partnership less than 20%. In addition, the federal and provincial government would have received $3.8 billion in taxes.

(g) There would have been a $685 million infrastructure project at the airport paid for by the private sector and not the taxpayer.

(h) The Government knew that construction and development would be delayed and future capacity problems would be exasperated to the detriment of the travelling public and Southern Ontario economy. The Government has wrongly tried to blame the delay on the Partnership, Allders International Canada and the Conservative Senators.

-- The Government knows that there is no legal or practical impediment to the turning over of the Pearson Airport's existing Terminals 1 and 2.

-- The creation of the Greater Toronto Airport Authority (GTAA) was delayed by the Government's own delay in appointing members to the board.

-- The delay involves the need for the GTAA to hire senior management (not done as of the date hereof) and to assemble a team, develop a business plan and then begin negotiations.

-- The transfer process will take 14 to 18 months. I understand the planned turnover date is April 1, 1996 (a difficult target to meet at best).

-- The turnover is planned almost 2 1/2 years after the construction should have started.

-- There has been no announcement as to how the GTAA will generate revenue or raise the required capital. The local airport authority model relies on a passenger facility charge, i.e., another tax on the travelling public.

This all leads to the question: Will anything happen to T1T2 before the next election? Perhaps Air Canada out of desperation will do as it did in the past, finance its own needs. What about the rest of the airlines and the travelling public who will not benefit from improvements by Air Canada and have to use Terminal 3?

(i) Bill C-22 will adversely impact every privatization project in Canada, whether federal or provincial. Investors and developers now realize that the Government can and will behave in a predatory and opportunistic manner with the injured parties having little if any legal protection.

The Victims

It is important for Canadians to understand what they have lost and who are the victims:

(a) Southern Ontario and particularly Metro Toronto had a $685 million infrastructure project delayed when the economy desperately needed it. Furthermore, it was being privately funded and not at the expense of the taxpayers.

(b) Matthews Group Limited, Matthews Contracting Limited and Norr Architects have gone into receivership, bankruptcy or restructuring resulting in the loss of more than 700 individual jobs.

(d) Private company shareholders also lost significant share value.

(e) Reputations of Canadian companies and individuals have been damaged.

(f) Nothing of significance has happened in Terminals 1 and 2 and nothing is likely to happen for some time.

(g) The Government of Canada has been trying to lay the guilt and blame for their wrongful actions on everyone else, while cloaking themselves as the protectors of the taxpayers. The Government took a gamble with the taxpayers' money and never told the taxpayers all the facts. The punitive, vindictive and confiscatory Bill C-22 was the cure. Fortunately, it was also unconstitutional. Bill C-22 was the tool for victimizing all the private interests in the Airport.

(h) The costs of Redevelopment are escalating. Costs of development have increased because of the problems related to increased passenger traffic, higher interest rates and increased material costs.

(i) Over 700 existing jobs were sacrificed as well as 3,500 new direct jobs. All the indirect jobs associated with the project were also sacrificed.

CONCLUSION

The Government found itself on the horns of a dilemma created during the heat of the election. They had campaigned against the incumbent government on the issue of "integrity". The Airport development was characterized as "patronage" and a "bad deal". Now reality - it was an excellent deal, a once in a lifetime deal. Not only was there no evidence of patronage but the Paxport Proposal was 194% better than the losing proposal.

The Transport Canada brief to Nixon did not contemplate honouring the deal. Renegotiation also did not appear to be a viable option even with the threat of legislation. The Government opted for cancellation and punitive legislation to limit the damages and deny access to the courts. Obviously, the Liberal Government's tactics have been that the Conservative Senators would be bullied by the allegations of "bad deal", "tainted deal", "last snatch at the public purse" and "helping their friends line their pockets".

It appears that "integrity" was not a consideration in so far as revealing the facts. It appears that the image of Liberal "integrity" was paramount in the protection of the public interest. Also, there appears to have been no concern for the victims.:

I can only conclude that the Nixon Report was not written in the public interest or taxpayers' interest. Otherwise, the Airport contracts would have been honoured. Almost 700 people would not have lost their jobs. An additional 3,500 people would be working today. A $700 million private infrastructure program would be underway. Ontario was robbed of jobs and economic activity. The consortium members lost their reputations and, in some cases, their businesses and the value of their shares. Bill C-22 should never be passed. If it is, it will be a shameful day for every Canadian. It would be unconscionable!

To me it seems impossible for anyone to look at the facts and not feel that a grave injustice has occurred. This was wilful. No one should turn a blind eye to this travesty and the damage done. It might happen to you! To any Canadian! What was done was estimated in terms of crass dollars and cents without any consideration for human values and civil rights.

There must be full and true disclosure. It is time for the veil of secrecy to end. The public should not be kept ignorant. Ignorance has been the Government's bliss.

Canadians must have a political institution that they can trust. The Senate is their last chance!

Gordon Baker

DEFINITIONS

"Airport Contracts" means the 500 contracts or agreements listed in the Schedules to Bill C-22;

"Alders International" means Alders International Canada Limited, a partner and the duty-free operation or;

"Claridge Group" means The Charles R. Bronfman Trust and Lockheed Corporation or their related companies;

"Dan Matthews Testimony" - Statement to the House of Commons Standing Committee on Transport, May 31, 1994 and Hansard, May 31, 1994.

"Matthews Investments" means Matthews Investments 1 Inc., Matthews Investments 2 Inc., Matthews Investments 3 Inc. and 1046498 Ontario Inc., partners in the Partnership;

"Mergeco" means the Partnerships of Claridge Group and Paxport Group with respect to Terminals 1, 2 and 3;

"My Testimony" stated by Gordon B . Baker to the House of Commons Standing Committee on Transport Respecting Bill C-22, May 31, 1994 and listening as reported in Hansard, May 31, 1994.

"Nixon" means Robert Nixon;

"Nixon Report" means the Pearson Airport Report, November 29, 1993 by Robert Nixon;

"Ontario Court" means the Ontario Court of Justice;

"Option Holder" means 2922797 Canada Inc.;

"Partners" means the partners in the Partnerships;

"Partnership" means T1T2 Limited Partnership;

"Partnerships" means the Partnership and Terminal 3 Limited Partnership;

"Paxport Group" means the Consortium composed of Matthews Group Limited, Allders International, Hartay Enterprises Inc., Agra Industries, Bracknell Corporation and related entities;

"PDC" means Pearson Development Corporation;

"Paxport International" means Paxport International Inc., the corporation carrying out the Industrial Benefits Program proposed under the RFP and included in the Airport Agreements;

"Pearson Development Corporation" means the Managing General Partner of the Partnership

"Plaintiff" means the Partnership and 2922797 Canada Inc.;

<1> Gordon Roy Baker, Q.C., is the sole trustee of the Matthews Paxport Trust (a trust for the shareholders/employees of Matthews Group Limited), whose four companies (hereinafter referred to as "Matthews Investments") are partners in Terminals 1 and 2 Limited Partnership (the "Partnership") and a shareholder of 2922797 Canada Inc. (the "Corporation"). The Partnership and the Corporation are parties to the Airport Contracts entered into between the Partnership and the Corporation and the Government of Canada for the redevelopment of Terminals 1 and 2 at Lester B. Pearson International Airport.

<2> Please refer to the Definitions section for defined terms.

<3> Tabs 3 and 4.

<4> (Because of the volume of material and reports referred to, I am providing excerpts relevant from the materials with this submission. Two copies of the full report, Volumes 1 and 2, are being provided to your office in separate volumes as reference volumes for you and your Senate colleagues).

<5> The deletions were made by Transport Canada, under the Access to Information Act.

<6> Bill Rowat (Associate Deputy Minister of Transport, Wayne Power and John Desmarais made this written presentation to Robert Nixon (Desmarais' Transcript, Tab 7, pages 5, 8 and 53). An October 29 version under cover memo of Bill Rowat, was previously provided by Transport to me under Access to Information; however, most material information had been deleted. See Tab 6(A). Also of interest was the fact that the October 29th brief was sent to Nixon one day after his appointment on October 28, 1993.

<7> A copy of the Deloitte Touche Report of August 17, 1993 is located at Tab 11.

<8> Source Transport Canada and not $26 million as stated by Mr. Nixon.

<9> (the net present value basis) and see Privatization - Tab 10, Page 15)

<10> Tab 11, Page 6

<11> Tab 11, Page 8

(Price Waterhouse Report, Page 447)

<12> Tab 11, Page 4

<13> From Treasury Board Approval - Access (Page 949). Also see copy of Orders-in-Council, PC 1993-1761 27 August (see Tab 3(1)A). Also November 1, 1993 memorandum to R. Nixon from W.A. Rowat enclosing Orders-in-Council - August 27, 1993 (Tab 6B)

<14> Tab 10, Pages 11, 12 and 13

<15> Tabs (C), (D) and (E)

<16> Reference Transport Submission Tab 10, Page 20.

<17> Tab 6(f)

<18> Desmarais, Tab 7, page 56 and Sgayias at page 55

<19> Tab 10, page 16

<20> Tab 10, page 16

<21> In My Statement to the Transportation Committee, Tab 3, pages 12 to 14

<22> Tab 10, page 14

<18> Tab 2, bottom of page 9 and top of page 10

<19> Philip Mathias, Financial Post, March 25-27, 1995, page 6 - "The 'flawed' report that scrapped the deal".

<20> Privatization, Tab 10, page 11

<21> Tab 10 of Privatization, page 16

<22> Tab 10 of Privatization, page 16

<23> Page 25-30 of the Transport Submission, Tab 10.

Pearson Airport Agreements (Special)