Pearson Airport Agreements (Special)

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Special Senate Committee on the Pearson Airport Agreements

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Minority Report

"What comes through to all sorts of people critical of our government is some sort of a quick pay off to friends who want to develop airports and it doesn't taste well and it doesn't sound well and it leaves all sorts of suspicions and it doesn't add up or balance."

- Don Blenkarn, Conservative Member of Parliament for Mississauga South, writing to Transport Minister Jean Corbeil, March 13, 1992

"The hard facts of the case must therefore be that [the Right Honourable Kim Campbell] chose to authorize the signing of the Pearson Airport agreements at a time when she knew that she would not be able to take responsibility for the consequences of that decision. And that looks very close to me like the work of a government which has already lost the moral authority to govern. To say that her decision was a constitutionally inappropriate exercise of power is, in my view, to put it mildly, but in the context of our customs and those of other parliamentary systems it, in my view, is also enough to justify whatever steps have to be taken to terminate the agreement."

- Professor John Wilson, professor of political science at the University of Waterloo, testifying before the Special Senate Committee on the Pearson Airport Agreements, September 25, 1995.

I. Introduction

On May 4, 1995, the Special Senate Committee on the Pearson Airport Agreements was formed with the following mandate:

"That a special committee of the Senate be appointed 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." [Minutes of Proceedings of the Senate, May 4, 1995, 1590- 92]

To fulfill this mandate, the Committee heard testimony from over 65 witnesses, and reviewed thousands of pages of documents. This testimony, and especially the evidence of the contemporaneous documents, demonstrated conclusively that the Pearson Airport deal was not in the best interests of the country, both in its substantive terms and because of the process by which it was brought into being.

From its inception, the redevelopment of Terminals 1 and 2 at Pearson Airport was driven by private developers, and in particular by Paxport Inc., a consortium headed by Mr. Don Matthews and his son, Mr. Jack Matthews.<1> Neither Don Matthews nor his son had any experience in developing or operating airports. Mr. Jack Matthews openly admitted that the first question people would ask him in meetings was, "Jack, what business do you have in the airport business?" And the only answer he could give was to point to his unsuccessful attempt to win the Terminal 3 contracts.<2>

Messrs. Matthews hired Mr. Ray Hession, a former high-ranking public servant, to serve as President of Paxport. In what no doubt will become a model case-study on lobbying for courses on business-government relations, Mr. Hession undertook first to persuade the political, business and public service communities of the need for immediate redevelopment of Terminals 1 and 2, and then to present Paxport as the best solution.

Mr. Hession was successful; Paxport's proposal was selected by the Government for the redevelopment project, even though it was known, right up to the Prime Minister, that Paxport could very well discover in "a matter of weeks ... that their proposal is not workable under current circumstances in the airline industry."<3> That is, in fact, what occurred. Paxport could not finance the project.

Within days of having had its proposal selected, and so winning the right to negotiate a contract to redevelop Terminals 1 and 2, Paxport was discussing a merger with its only competitor for the project, the Airport Terminals Development Group.<4> This merger was finalized just five weeks later. Senator Finlay MacDonald, the Chairman of the Senate Committee on the Pearson Airport Agreements, expressed surprise at what he termed "the almost indecent short length of time between Paxport becoming a winner and a merger taking place."<5>

This inquiry into the Pearson Airport Agreements revealed to the public how Government worked under the direction of the Right Hon. Brian Mulroney. Lobbyists, to borrow the words of a journalist who sat through many of the hearings, "swarmed" over senior levels of government in their determination to win the contract for their client.<6> The Committee learned that it was "not ... unusual" for a company like Paxport to receive debriefings from senior political staffers to Cabinet ministers on cabinet committee meetings<7> -- and the Committee saw concrete evidence of this in a report from a lobbyist to Paxport's President that provided a "full debriefing" on a Cabinet Priorities and Planning Committee meeting.

The Committee heard how the Prime Minister of Canada, as a result of an approach made at a social function, asked the Clerk of the Privy Council, the Government's most senior public servant, to try to arrange things "so that everybody could get a piece of the action."<8>

The Committee saw internal Paxport memoranda discussing whether it would be "smart strategy" to have the Prime Minister "push/order" the Hon. Douglas Lewis, then Minister of Transport, to award the redevelopment contract to Paxport unilaterally, without a competition. The Committee heard testimony of $2.4 million contracts to a lobbyist who was a former senior member of Mr. Mulroney's staff -- contracts which were contingent on this deal going through. The Committee heard testimony of lobbying campaigns that "targeted" high-ranking members of Cabinet, their political staff, officials within the Department of Transport, Members of Parliament, officials in the Privy Council Office and in the Prime Minister's Office. And the Committee saw internal government memoranda that predate the announcement of the winner of the Request for Proposal competition, commenting, "This may be a done deal."<9>

The Committee saw documents evidencing the numerous side deals and non-arms length contracts by which the developers were going to enrich themselves out of Pearson Airport, beyond their profits out of the already rich (23.6% rate of return) redevelopment deal. These documents included a contract to pay $3.5 million over 10 years to a Matthews Group company, labelled as a "consulting fee" but with no mention of any services, consulting or otherwise, to be provided. The Committee saw a $3.15 million contract to the parent of another consortium member, to serve as a "consultant" in the management, operation, development and re-development of Terminals 1 and 2. The Committee saw evidence of a $4 million contract to yet another Matthews Group company, as a promotion fee to try to win other airport development contracts for the consortium internationally. Despite being completely unrelated to Pearson Airport, the money would apparently have been paid from Pearson revenue, somehow as part of the cost of operating the Pearson terminals.

The Committee saw evidence of construction management contracts, architectural and engineering service contracts, and other management contracts, to name just a few -- all adding up to millions of dollars in extra revenue for the T1T2 consortium members. The Committee also saw Government documents that struggled to piece together these contracts, match them to the proper contracting parties, and locate them within the complex web of each consortium member's corporate structure. One such document was aptly entitled, "The Matthews Enigma."<10>

The Government gave away any real right to oversee or to limit this self-dealing. It also gave away any real ability to complain if the consortium was not living up to its side of the deal -- the only remedy the Government had was to step in and take over the airport, something unlikely to occur except in a case of the utmost serious breach. Thus the consortium would have had considerable leeway to bend the rules -- and the lease was for 57 years.

The evidence is clear that the project to privatize Terminals 1 and 2 was launched against the advice of Air Canada, Canadian Airlines International and the rest of the Canadian airline industry. Once launched, the Government employed a process that, it was warned, "could convey the message that the Department is not committed to a fully open and competitive process."<11> It was proceeded with against the advice of public servants, and in the face of concerns expressed both openly in Parliament by the Rt. Hon. Jean Chrétien, then leader of the Official Opposition, and privately in correspondence between a Conservative Member of Parliament for Mississauga (where the airport is located) and the Minister of Transport.<12> Late in the negotiations, the Terminal One air carriers sent one final plea to the Minister of Transport and to Paxport, ending: "Who will remain in business to pay for your extravagant folly?"<13>

The deal was negotiated by officials "working at a furious pace"<14> to meet a deadline that was imposed by Prime Minister Mulroney so that the deal could be closed before he left office in June, 1993.<15> Internal Government memoranda noted that this pressure for speed in the negotiations gave the consortium "an upper hand in negotiations."<16> Ultimately, the deadline could not be met. The agreements were finally signed in a tumult of public controversy, in the middle of the election campaign, and at the express direction of the Prime Minister, the Rt. Hon. Kim Campbell, acting with what one witness characterized as an unprecedented "reckless disregard for propriety."<17>

The Committee heard testimony from both the Clerk of the Privy Council and a political science professor at the University of Waterloo that the Government of Canada observes a general rule to act with caution as soon as Parliament is dissolved and an election is underway.<18> Under this "caretaker convention," the Canadian government accepts a "firmly restricted" freedom of decision making, a freedom confined to only routine matters of administration.<19> This rule was not observed in the case of the Pearson Airport deal. The Committee was told that signing the Pearson agreements "was a constitutionally inappropriate exercise of power... [that was] enough to justify whatever steps have to be taken to terminate the agreement."<20>

These contracts would have established a precedent dangerous to Canada's democratic process, a precedent whereby a government could conclude controversial agreements during an election campaign -- even when it is clear that Government is about to lose. These contracts would have bound the Canadian government to a 57-year lease under terms that, as a matter of responsible business management, were not in the country's best interest. Furthermore, the privatization of Canada's largest, busiest and most profitable airport was inconsistent with the stated Government public policy and the policy which was being applied at all other major airports in Canada.

Was there political manipulation? Absolute proof may be impossible to retrieve. Rules prohibiting disclosure of cabinet documents or advice to ministers, and an understandable reluctance on the part of civil servants to point fingers in public at their former political masters, or to criticize the terms of a deal they themselves negotiated, all combine to enshroud much of this already murky deal, that the Committee was unable to penetrate. But the documentation that was disclosed to the Committee reveals a degree of involvement and direction from the Prime Minister and members of his Cabinet, and their close advisors, that goes far beyond what one would anticipate in any normal commercial transaction.

For these reasons, we support the decision by the Canadian Government to cancel the Pearson Airport Agreements.

I. Background: Policy

The Government headed by the Right Hon. Brian Mulroney began with a clear and consistent policy toward the development of the 150 airports then run by the federal government -- which included all the major Canadian airports. Austin Douglas, retired Associate Executive Director, Airports Authority Group of Transport Canada, testified about the evolution of this policy, which began with the Mazankowski Task Force Report in 1986.

That Task Force, headed by the Hon. Don Mazankowski, included representatives from both the public and private sectors. It looked at four options: a private sector option; a Crown corporation option; a local airport authority option ("LAA"); and a Transport Canada Airports Authority Model Option, which was a more sophisticated and commercialized version of what was going on at the time. The report ranked local airport authorities first, and eliminated the private sector option altogether from the recommendations. As Mr. Douglas testified:

"[T]he report said that [the private sector option] was not necessarily the best way, [nor] the most sensitive way of dealing with all the different publics involved in deciding what was best done to stimulate local economic development and meet the interests of all the people who would be most likely to be affected by the airport." [Committee Transcript, Tuesday, July 11, 1995, Issue No. 2, 2:28-29.]

Steps were quickly taken by the Mulroney Government to implement this policy. In the spring of 1987, the Government issued a paper entitled, A New Policy Concerning A Future Management Framework for Airports in Canada.<21> As Mr. Douglas testified, that policy statement did not include the so-called private sector option as an acceptable choice, except insofar as it provided that private sector interests "should be encouraged in every way possible to participate in the actual development opportunities and operation of the airport." [Committee Transcript, Tuesday, July 11, 1995, Issue No. 2, 2: 30.] (The private sector role in the construction and operation of Terminal 3 had been contracted for before the Government had formulated its policy in 1987. See: Committee Transcript, Tuesday, July 11, 1995, Issue No. 2, 2: 44.)

Mr. Nick Mulder, Deputy Minister of Transport, testified that, "Out of that [1987 policy statement] came the policies, as you are all familiar with, of having local airports authorities established, of which four were negotiated in [the] early 1990s, and even attempts were made in Toronto to set up local airport authorities." (Committee Transcript, Tuesday, July 11, 1995, Issue No. 2, 2:15.]

In early April 1992, agreements were signed transferring the international airports in Vancouver, Montreal, Edmonton and Calgary to local airport authorities. [See: Transport Canada Press Releases Nos. 56 - 59/92, Committee Doc. 00015.]

Mr. Glen Shortliffe -- formerly Clerk of the Privy Council (1992 - 1994) and Deputy Minister of Transport (May 1988 - October 1990) -- testified that the policy adopted for Toronto marked an exception to the policy applied elsewhere by the Mulroney Government:

"[W]as this a departure from the generally announced LAA policy that had been put out in 1987? Sure it was. Was it a deliberate policy decision by the government of the day? Yes it was. And was it taken to address what was perceived as a crisis at Pearson? Yes, it was." [Committee Transcript, Thursday, July 13, 1995, Issue No. 4, 4:70, emphasis added.]

The issue of the readiness of the Toronto LAA to take over Pearson has been hotly disputed in the committee proceedings. The Greater Toronto Regional Airports Authority ("GTRAA") testified that it was as ready and able, or even more ready and able, to take over Pearson as any of the other LAA's that were accepted by the Mulroney Government in the other major Canadian air travel centres. This issue will be considered below.

A different issue concerns the degree to which a crisis actually existed at Pearson, and the degree to which an alleged crisis was used as an excuse to avoid the LAA process, and to adopt an extraordinary "solution," a private sector option for Pearson.

Background: Crisis at Pearson?

Both Mr. Shortliffe and the Hon. Doug Lewis (Minister of Transport, February 1990 - April 1991) testified that a crisis did exist. Mr. Lewis claimed that virtually every day someone brought to his attention the need to "fix Pearson." [Committee Transcript, Thursday, July 13, 1995, Issue No. 4, 4:4-5.]

Mr. Shortliffe told much the same story, adding that: "Pearson was a mess. It was a disgrace. And worst of all, it was not working." [Committee Transcript, Thursday, July 13, 1995, Issue No. 4, 4:64.]

He told our Committee that in the later 1980's there was a shortage of air traffic controllers, inadequate runways, and terminals that were not up to the job of handling the projected levels of traffic in the years ahead. He described Terminal One as a "one-horse shay which had collapsed," and complained that Terminal Two "was clearly suffering from an inadequacy of gates." [Committee Transcript, Thursday, July 13, 1995, Issue No. 4, 4:65.]

In 1989-90 there were problems at Pearson Airport -- nobody has asserted the contrary. The controversy relates to which problems the Government decided to address, and how it proceeded to address those problems. As will be seen, the final deal at issue in this inquiry did not address the air traffic controller situation, nor did it address the runway problem. No construction would have occurred at Terminal 1 until 1997 at the earliest. There would have been earlier construction at Terminal 2, but no new gates would have been added.

Moreover, the situation at Pearson changed rapidly with the advent of the recession. As Mr. Gardner Church, former Deputy Minister for the Greater Toronto Area in the Ontario Government, noted, "[D]emand on the airport facilities had dropped dramatically, and the crush from '89 was no longer an issue." But the project continued, on the basis of "extraordinary" flight data that projected the future demand on the airport facilities. [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:21.]

Later, Mr. Church elaborated, explaining that the "extraordinary" flight data used as a basis for the decision to proceed with the private development of the terminals was derived from the unique growth experienced in Toronto in 1986-89 -- "the most extraordinary growth period in the history of the country and by far the most extraordinary growth period in the history of Toronto and Toronto aviation." [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:22.] In fact, the evidence was indisputable that this growth pattern has not continued.

On November 16, 1992, three weeks before the Government announced the selection of Paxport's proposal as the "Best Overall Acceptable Proposal" to redevelop the terminals, Glen Shortliffe, then Clerk of the Privy Council, wrote to Prime Minister Mulroney:

"Transport has identified a number of issues to be considered before proceeding:

• the recession is continuing longer than expected and traffic may decline due to the current airline industry situation so the need for the expanded terminal space has slipped 2 to 3 years. There is no need to start construction until 1996;
• it had originally been expected that construction might start next year. Transport's current estimate is now 1994 at the earliest as it will take a minimum of 12 months to negotiate the lease. Paxport will have to negotiate new leases with the carriers and other T1/T2 tenants and arrange financing before signing the lease;
• Carriers' costs would double to $60 million in the first year and increase by a factor of four in ten years. Air Canada has asked that the redevelopment be postponed.
• a Local Airport Authority (LAA) may be established for Pearson. The five regional chairmen, led by Metro Toronto, have written to Mr. Corbeil indicating their intention to proceed with the LAA process. The LAA would assume any lease for T1/T2. There may be pressure from the province for a postponement until the LAA can be established." [Memorandum for the Prime Minister from Glen Shortliffe, dated November 16, 1992, Doc. 002188, emphasis added.]

It is clear from the documentation that the urgency to "fix" Pearson -- the "crisis at Pearson" -- had evaporated by the time the proposals were being assessed. Air Canada, the major tenant at Terminal 2, advocated postponing the redevelopment; the cost to the travelling public would quadruple to pay for the redevelopment; and the Government of Ontario wanted to wait until an LAA could be established at Pearson. Notwithstanding all of the above, the Government displayed a single-minded determination: pushing to completion this private sector solution to a problem that did not exist. One can only wonder whether their determination would have been as steady had the recipient been a not-for-profit local airport authority, instead of a private sector entity, whose participants stood to make millions of dollars.

The Status of the Toronto LAA

Former Transport Minister Douglas Lewis testified that the reason he did not transfer Pearson Airport to a local airport authority was that the Toronto LAA was not "a viable alternative." [Committee Transcript, Thursday, July 13, 1995, Issue No. 4, 4:9.]

This assessment is in marked contrast to that of the members of the Greater Toronto Regional Airport Authority who testified before the Committee. They described a process in which Mr. Lewis persisted in imposing significantly more stringent demands on them than were imposed on any of the other Canadian LAAs. Mr. Gardner Church testified:

"The federal government required support from the municipalities. Now in Vancouver and Montreal, they required support from a few municipalities. For reasons about which you can speculate, they required absolute unanimity twice from the Toronto community. And to get absolute unanimity from 35 municipalities on anything on any day is an heroic effort, and we undertook that effort twice successfully." [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:16.]

When asked by Senator John Bryden to cast light on why the criteria applied to the GTRAA were more onerous than those applied to other formative LAA's, Gary Harrema, Chair of the Durham Regional Council replied:

"No, sir, I cannot. We did ask. And Mr. Lewis is very firm on the matter when he indicated that we had to have decisions from all our council.... Mr. Lewis indicated to us that privatization was the way that he wished to proceed and if we wanted to get involved in it at some stage, he did not say we would be totally excluded, but he certainly was not indicating to us that we should proceed, that he would take an LAA.... We met Mr. Corbeil later on again in '92 and it was similar -- somewhat different meeting, but similar reactions." [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:18.]

In this time period, Paxport was lobbying Transport Canada to declare a three-year moratorium on the formation of new LAAs. When the Greater Toronto Area Airport Study Committee recommended that, "No action be taken with respect to further privatization of Terminals at Lester B. Pearson International Airport ... so that our task force may discuss privatization in context with the creation of a local airport body," the President of Paxport complained to Dr. Huguette Labelle, Deputy Minister of Transport, that this was "local obstruction," and that, "It is difficult to imagine the municipal and local interests of the GTA putting the national interest ahead of their own parochial needs." [See: Letter dated November 26, 1990 from Mr. Ray Hession to Dr. Huguette Labelle, Committee Doc. 001181; and see, Corporate Report from Mayor Hazel McCallion (Mayor of Mississauga) to the Chairman and Members of the Administration and Finance Committee, dated October 17, 1990, Committee Doc. 001181.]

The documents seen by the Committee support the GTRAA contention that the criteria being applied to their recognition were not the same as those applied to other LAAs. A letter of May 6, 1993 from the Hon. Jean Corbeil to Gerry Meinzer, then Interim Chair, Greater Toronto Regional Airport Authority, refused Mr. Meinzer's request for official recognition and authorization to begin negotiations for the transfer of Pearson Airport to the GTRAA. [Committee Doc. 000549] In the letter, Mr. Corbeil gives as his reason "that certain Councils have qualified their endorsements to some extent."

However, a handwritten notation on the file copy of this letter, apparently written and initialled by M.E. Farquhar, Director General, Airport Transfers at Transport Canada, says:

"Notwithstanding the above observations, the Toronto LAA already would appear to meet the government's prerequisites for becoming a LAA, consistent with the criteria applied to the first four LAA's." (emphasis added)

During the hearings much was made of the issue of the Toronto Island Airport, and the fact that one region, the Region of Peel, was insisting that the Toronto Island Airport be included within the transfer to the GTRAA. However, it is clear from the evidence that this is additional evidence showing that the Toronto LAA was held to a standard different from that applied elsewhere in Canada. For example, the Government proceeded to transfer one of two airports in Edmonton to a local airport authority, leaving the other airport in the hands of the City of Edmonton. Mr. Michael Farquhar, the person within Transport Canada responsible for negotiating the transfers of airports to LAAs, testified as to the decision to proceed with the transfer, even though the LAA wanted to negotiate the transfer of both airports:

"[F]rom the authority's point of view, it probably makes more sense to take over and demonstrate your ability to operate the major airport first and foremost, rather than trying to do it all at once.... [T]he minister was very familiar with the Edmonton situation." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:50.]

Mr. Gerry Meinzer testified that Mr. Farquhar had advised the regional chairs in 1992 that they had met all the conditions for recognition. [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:46.] Mr. Farquhar himself was clear when he testified that by June, 1992 there existed in Toronto a body with whom Transport officials could discuss airport transfers. [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:79.]

On June 18, 1993, Mr. Farquhar had prepared a briefing note for the Minister, recommending that, "Even if the Regional Municipality of Peel reconfirms its former resolutions on the proposed Toronto Island Airport transfer it would still be appropriate to endorse the GTRAA in light of our recent experience in Edmonton." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:49.]

And indeed, on July 12, 1993, the Ontario Government officially recognized the Greater Toronto Regional Airports Authority "for the purpose of entering into formal airport transfer negotiations with Transport Canada." [Committee Doc. 00069] The province's preference for an LAA at Pearson Airport was clearly stated in correspondence to the federal Transport Minister, including a letter dated July 30, 1991 from the Ontario Minister of Transportation to the Hon. Jean Corbeil [Committee Doc. 000565].

It is curious that while the Minister of Transport was insisting that the GTRAA demonstrate unqualified support for its formation from all the municipalities, no similar unqualified support was ever required for the private redevelopment alternative. In fact, the unequivocal and adamant opposition of municipalities to what the Government was proposing by way of the private sector solution carried absolutely no weight. While a public sector LAA required unanimous public support, the private sector solution could be pushed ahead regardless of the level of outright public opposition.

The Deputy City Clerk for the City of Toronto sent the Right Hon. Kim Campbell, then Prime Minister of Canada, a letter on October 18, 1993, advising her of a motion adopted by Toronto City Council. That motion said:

"Whereas the Government of Canada has announced that Paxport has won the bid for the privatization of Terminals 1 and 2 at Lester B. Pearson International Airport; and

...

"Whereas the Government of Canada appears to have rushed to sign a deal which appears to be not in the best interest of the citizens of Toronto; and

"Therefore be it resolved that the Government of Canada be advised of the City of Toronto's opposition to the privatization of Terminals 1 and 2 of Lester B. Pearson International Airport in the current format, and that the City request that the Government of Canada re-open and reverse its decision, permitting further consideration." [Letter to the Rt. Hon. Kim Campbell, Prime Minister of Canada, from Deputy City Clerk, City of Toronto, dated October 18, 1993, Committee Doc. 002086.]

The evidence reveals that Toronto's case was pursued in a manner contrary to the policy established by the Government for the international airports in major centres throughout Canada. What was done at Toronto was justified to us by the urgent need to "fix" Pearson, and to do so quickly: speed was imperative. However, the private option to redevelop Terminals 1 and 2 was no speedier than the LAA option.

Even more important, however, is the fact that at the time the request for proposals ("RFP") was issued by the Government, there was no urgency to "fix" Pearson. As a result of the recession, Pearson was operating very much below capacity. The Mulroney Government could have adhered to its LAA policy at Pearson, just as it did at every other major airport in the country.

But the LAA option was rejected -- not only rejected, but, as the evidence suggests, deliberately frustrated -- in order to guarantee that there would be a private sector solution to the problem. Whether that problem still existed was irrelevant.

II. Background: Terminal 3 Process

In considering the process by which proposals to redevelop Terminals 1 and 2 were requested and then evaluated, the Committee had the benefit of the Terminal 3 experience for comparison. In contrast to the Terminal 1 and 2 redevelopment, the decision to invite the private sector to design, build, and operate Terminal 3 was made in September 1986 -- before the adoption of the 1987 policy framework for airports, which advocated the use of LAA's. [Committee Transcript, Tuesday, July 11, 1995, 1995, Issue No. 2, 2:44]

In September 1986, the Minister of Transport called for "expressions of interest" from the private sector, and asked for replies by November 19, 1986, three months after the call. [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:27.] Ed Warrick, retired Project General Manager, Major Crown Projects, Pearson Airports, testified that eight submissions were received in response. The RFP was issued on December 18, 1986, with a deadline of May 1, 1987, or approximately four months later. Thus, there were approximately seven months from the time of the call for expressions of interest to the time when the proposals had to be submitted. [Committee Transcript , Wednesday, July 12, 1995, Issue No. 3, 3:27.] Four proposals were received; among the proponents were the Airport Development Corporation and Falcon Star. The Matthews Group was the main component of Falcon Star. [Ibid .]

While not a member of the original Airport Development Corporation, the Claridge Group came in as a minority stakeholder after the contract was signed. [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:30-31.] Peter Coughlin, President of Claridge Properties Ltd., was very clear as to why Claridge purchased a controlling interest in Terminal 3: "Our rationale for purchasing an interest in Terminal 3 was driven, to a large extent, by the government's announced intention to privatize Terminals 1 and 2. We did not want to operate just one piece of the pie. To us, operation of all three terminals was necessary in order to: Diversify our risk across the terminals; to produce significant operating and financial synergies; and to enhance our economic return." [Committee Transcript, Tuesday, September 12, 1995, Issue No. 17, 17:12.]

The proposals were evaluated during May, 1987. Mr. Warrick testified that financeability was one of the factors addressed in the evaluation. [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:28.] The financial viability of each proposal's proponent carried roughly 40 per cent of the total weighting in the evaluation. [Committee Transcript, Tuesday, July 11, 1995, Issue No. 2, 2:74.]

Mr. Warrick told the Committee that the evaluation was conducted by senior Transport Canada officials, supported by other groups within government, who could assist with opinions on security, customs and immigration, and pre-clearance matters. [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:28.]

On June 22, 1987, the Government announced the "preferred proponent," the Airport Development Corporation. Mr. Warrick testified that he was aware of adverse reactions to this selection by the unsuccessful proponents. In particular, the Matthews Group "were unhappy and voiced their displeasure" with the selection. [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:28-29.]

Treasury Board approved the final lease in April, 1988, nineteen months after the call for expressions of interest. Terminal 3 opened on February 21, 1991. [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:29.]

The Committee was told that the procedure used for Terminal 3 has become, in general, a model of how to conduct such public proposal calls. Al Clayton, Executive Director, Bureau of Real Property and Material at Treasury Board, testified that his office used "Terminal 3 as a model, as a good practice of how you do such -- not necessarily how you do airports, but how you do these types of public proposal calls." [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:37.]

III. The Process: Terminals 1 and 2

Events Leading up to the RFP

On August 18, 1989, the Hon. Benoit Bouchard, Minister of Transport, and Ms. Shirley Martin, Minister of State for Transport, announced their Strategy for the Future of Aviation in Southern Ontario. It included an initiative to develop Pearson Airport "to its optimum capacity." [Minister's Press Release No. 98/89, August 18, 1989.] The short-term (within two years) measures to implement this strategy included "top priority for renovation plans to Terminals One and Two at Pearson International Airport which, along with new Terminal Three to be completed by mid-1990, will give the travelling public three efficient, comfortable terminal buildings." Other short-term measures included two new runways for Pearson, recruitment of air traffic controllers, and development of Hamilton Airport to accommodate flights transferred from Pearson.

As will be seen, the negotiated agreement with T1T2 Limited Partnership (the consortium that resulted from the Paxport-Claridge merger) would have made further development of Hamilton Airport -- as an alternative to Pearson -- impossible: the developers succeeded in persuading the Government to agree to a passenger diversion guarantee, by which the Government specifically undertook not to divert passengers away from Pearson until certain passenger levels at Pearson had been met.

Documentation provided to the Committee shows that even before this press release had been released, the Matthews Group, which had bid unsuccessfully on the Terminal 3 project, was positioning itself to redevelop Terminals 1 and 2 at Pearson Airport. As early as May, 1989, Mr. Ray Hession (who became President of Paxport Inc.) was meeting with Deputy Ministers and Assistant Deputy Ministers in both the Department of Finance and Transport Canada, making the case for private redevelopment of Terminals 1 and 2, and for the selection of Paxport as the "preferred developer." [See, e.g., letter from Mr. Hession to Mr. Glen Shortliffe, Deputy Minister of Transport, dated August 15, 1989, Committee Doc. Ref. 5700-1.35/P1-13, 1-1-#0157.]

It is interesting to note the criteria advocated by Paxport for evaluating developers: the magnitude of the return to the Crown is a central concern, while the financeability of the proposal, including the developer's strength, is strangely absent. Further, while "qualitative" improvement in specified service to the travelling public is emphasized, there is no mention of any criteria concerning the commensurate rise in cost to that travelling public. The evaluation criteria adopted by the Government to assess the proposals to redevelop Terminals 1 and 2 closely reflected those advocated by Paxport -- in sharp contrast to those used in the Terminal 3 proposal evaluation. [Committee Doc. Ref. 5700-1.35/P1-13, 1-1-#0157.]

In September 1989, Paxport submitted an unsolicited proposal to redevelop Terminals 1 and 2. Unsolicited proposals were later received from Canadian Airports Ltd. (which included the British Airports Authority -- a group with extensive experience in airport development and operation) and Airport Development Corporation (the developer of Terminal 3, which by this time included Claridge as a minority shareholder). On June 1, 1990, Paxport and Air Canada joined together to submit a proposal, described by Senator Jessiman as "a Paxport plan to integrate Terminals 1 and 2." [Committee Transcript , Tuesday, August 15, Issue No. 11, 11:48.]

Throughout this period, Paxport was making its case to Members of Parliament, Cabinet Ministers, Ministers' political staff, and public servants. To do this, Mr. Hession engaged a team of lobbyists led by William Neville and including John Legate and Hugh Riopelle. They met "with officials of the Departments of Transport, Finance, Justice, Industry and International Trade, the Treasury Board, and the Privy Council Office ... political staff at the departments of Transport, Industry and Finance, the Treasury Board, the Deputy Prime Minister's Office and the Prime Minister's Office ... [and] the ministers of the Crown, including the ministers of Transport, Finance and Industry, the Treasury Board[.]" [Minutes of Proceedings and Evidence of the Standing Committee on Transport, May 26, 1994, 7:8.]

The truth of this testimony is borne out by a review of Mr. Hession's daily agenda books, copies of which he provided to the Committee. The pages document numerous meetings, lunches, dinners, and golf games with Cabinet Ministers, including not only the Hon. Jean Corbeil, when he was Minister of Transport, but also the Hon. Harvie André and the Hon. Otto Jelinek; with senior members of political staffs to Cabinet Ministers, including the Hon. Doug Lewis, the Hon. Jean Corbeil, and the Hon. Don Mazankowski (both from when he was Minister of Transport and Finance Minister); and the Chiefs of Staff to the Prime Minister, including a meeting on July 22, 1991 with Mr. Norman Spector, Chief of Staff to Mr. Brian Mulroney, and a meeting on July 20, 1993 with Ms. Jodi White, Chief of Staff to Ms. Kim Campbell.

Mr. Hession also met with other individuals reputed to be close to Prime Minister Mulroney, including the Hon. Guy Charbonneau (appointed Speaker of the Senate by Mr. Mulroney in 1984), and with two close friends of Mr. Mulroney dating back to his undergraduate days, Mr. Sam Wakem and Dr. Fred Doucet. (Dr. Doucet later became a registered lobbyist for Paxport.) In addition, there are many meetings with public servants, including not only those in Transport Canada with immediate responsibility for Pearson Airport, but also individuals in the Privy Council Office, most notably Mr. Glen Shortliffe, the Clerk of the Privy Council.

This campaign continued throughout the relevant time period, from 1989 through 1993. As will be discussed below, it yielded valuable results for Paxport.

We do not object to valid attempts by Paxport or other groups to seek to influence the Government in its policy-making; our objection is to their success, that is, to the fact that members of the Government were prepared to change public policy and make new rules in response to these representations, often against the considered judgment of their public servants, against good business judgment, and against the best interests of the country.

The access available to Paxport and its lobbyists is revealed in a memorandum provided to the Committee by Mr. Hession.<22> In that memorandum (dated July 12, 1990, to Mr. Don Matthews, Mr. Jack Matthews, Mr. Peter Goring and Mr. Trevor Carnahoff), Mr. Hession reported on two recent meetings of interest to Paxport. [See: Memorandum to "Mailing List," from Mr. Hession, dated July 12, 1990, Committee Doc. Ref.: 5700-1.35/P1- 13, 1-3-#0272.]

The first was a meeting he had the day before with Mr. Shortliffe. Among other issues discussed were: (1) the evaluation criteria that would be applied in selecting a developer; (2) the need for an approved policy to "ensure that no foreign company will directly or indirectly manage and control the terminals" (this presumably was aimed at the anticipated competition from Canadian Airports Ltd., that included British Airports Authority as a significant part of the group); and (3) whether an approved policy was in place "that no private company will dominate the management and control of terminal facilities" (this presumably was aimed at anticipated competition from Airport Development Corporation, the developer at Terminal 3).

The second meeting described in the memorandum was between Mr. William Neville, one of the registered lobbyists acting for Paxport, and Mr. Everson, the Chief of Staff to Transport Minister Doug Lewis. Mr. Neville's report, quoted in Mr. Hession's memorandum, states that he had "a full debriefing yesterday (July 10) from Warren Everson re the situation post-last week's P[riorities] and P[lanning] meeting." (emphasis added.)

Mr. Neville reported that the Hon. Doug Lewis, Minister of Transport, had "promised the Prime Minister he will be before Cabinet in September with specific recommendations on... an "efficient" competition process to select a developer for full-scale redevelopment of 1 and 2." Mr. Everson described his Minister as "quite nervous" about "any attempt to jump over some form of competition to a unilateral decision."

There were, according to Mr. Everson, problems in such an approach, including:

• The existence of internal analysis by MOT [Ministry of Transportation] officials advising the Minister that, in their judgement, major expansion of T1 and 2 is not required before 1997;
• A Coopers, Lybrand valuation that the current terminals are worth $1.6 billion and that valuation should be reflected in any privatization; and
• "Heavy pressure" from the other potential bidders, including increasing threats by BAA [British Airport Authority] partners Bitove and Cogan that they might well launch legal action if they are denied a fair opportunity to compete.<23>

Mr. Neville reported:

"Back on the central issue, it is clear at this point that Lewis of his own accord is not prepared to move unilaterally to award development to PAXPORT/Air Canada. He will have to be pushed/ordered -- which, I guess, begs the question whether that is smart strategy even if it is doable. I have my doubts." [Memorandum to "Mailing List," from Mr. Hession, dated July 12, 1990, Committee Doc. Ref.: 5700-1.35/P1-13, 1-3-#0272, emphasis added.]

When he testified about this memorandum, Mr. Hession was clear that in his understanding, only one person is in a position to "push/order" a Cabinet Minister to do anything:

Senator Bryden: [Y]ou have been a long-term civil servant, you are perhaps one of the most knowledgeable people "on the Hill." In our system, cabinet system, who is in a position to either push or order a cabinet minister?

Mr. Hession: There's only one person who could do that.

Senator Bryden: Who's that?

Mr. Hession: That's the Prime Minister.

Senator Bryden: That would be Brian Mulroney, at this time?

Mr. Hession: Yes. [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:87.]

Mr. Hession concluded this memorandum, noting that concerns about

"foreign interests achieving control of terminal management at Pearson; [and] the undesirability of monopolistic dominance of terminal operations by ADC ... could sway the cabinet to proceed with direct negotiation or accept a competitive process highly favourable to our cause.

"We must, therefore, maintain the intensity of our efforts and, I believe, broaden their scope to include full cabinet and caucus." [Memorandum to "Mailing List," from Mr. Hession, dated July 12, 1990, Committee Doc. Ref.: 5700-1.35/P1-13, 1- 3-#0272.]

Mr. Hession's memorandum discloses the role of lobbyists in this project, the role of ministers' political staff in assisting Paxport, the dynamics within Cabinet, the apparently preferred position of Paxport, as well as the substantive issues in the redevelopment project itself. The memorandum shows that Transport Minister Lewis' Chief of Staff had information that there was no urgency about the redevelopment project, and that major expansion of the terminals was not required for another seven years. In a letter to the Editor of the Globe & Mail dated September 22, 1995, Mr. Everson confirmed having had this meeting with Mr. Neville, and stated, "Naturally Mr. Lewis was aware of these meetings and authorized them."

On October 17, 1990, Transport Minister Doug Lewis announced his intention to invite competitive proposals to develop Terminals 1 and 2. [Press Release No. 198/90, dated October 17, 1990.] At that time, an environmental assessment and review panel was considering a proposal by Transport Canada to add new runways at Pearson. Minister Lewis made it clear in meetings with Paxport, Airport Development Corporation, and Canadian Airports Ltd. that the terminal proposal would not be rushed at the expense of the environmental review.

The RFP was not issued until March 16, 1992, that is, seventeen months after this announcement. When asked about this delay, Mr. Barbeau told the Committee that:

"There were a lot of things going on.... [T]here was a whole lot of discussion going on, as I pointed out before, I mean, all over the place, and other things were happening.

"Certainly what was happening in the later part of that period is that the traffic at Pearson had begun to slow down. There were signs of the economy really taking a dive and the traffic was slowing down." [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:93.]

Throughout those seventeen months, Paxport was urging the Government to adopt the developer selection process best suited to Paxport's success -- in particular, Paxport advocated a "contract definition" approach. As explained by Mr. Hession in a letter to Huguette Labelle, then Deputy Minister of Transport:

"Contract definition - This option involves a three-stage process wherein the developer is chosen by the government on the basis of non-financial (price) considerations in the 60-90 day first (contractor qualification) stage. The process then results in a negotiated agreement based on a development contract proposed by the developer at the end of the 90-120 day second (contract definition) stage. The third (implementation) stage would commence at a time negotiated in the development agreement. This option has the political advantage of objective selection in stage one and the achievement of a negotiated balance as between the government, air carrier and private developer interests in stage two." [See: Letter from Mr. Hession to Dr. Labelle dated December 7, 1990, and attachment.]

Mr. Hession pointed out that this approach was one of three. Another option was a competitive proposal call; he rejected this as taking too much time. He also noted that, "The option has the political advantage of appearing completely objective although, typically, there is little or no practical political discretion in the decision-making." The final option was a negotiated agreement between the Government, air carriers and the private developer. While this option was the fastest, Mr. Hession recommended against it; he noted it "has the disadvantage of appearing to be subjective and politicized."

In addition to avoiding competition, it is notable that Paxport's preferred approach minimized any need for the developer to demonstrate financeability; when officials pressed Mr. Hession with their concerns regarding financial selection criteria, he replied by saying:

"The contract definition approach envisages a selection process based on both non- financial and financial criteria. Of course, the government must secure an advantageous financial arrangement and therefore include financial criteria as part of the basis for competitive selection." [See: Letter from Mr. Hession to Dr. Labelle, dated January 18, 1991.]

Thus, from inception, Paxport lobbied to assure that any financial criteria requirement would relate to the "return to the Crown" issue, not to the ability of the developer to finance the proposal.

Paxport also lobbied strenuously in this period against any need to have an "Expression of Interest" or prequalification stage in the proposal process. As discussed above, the Terminal 3 project, which officials testified was viewed as a "model" of how such proposals should be handled, had entailed a two-stage process, that is, an expression-of- interest ("EOI") or prequalification phase, before the request for proposals.

Paxport's efforts to this end were particularly evident in a series of meetings held by Transport Canada officials during the week of April 15, 1991, with each of the three developers known to be interested: Paxport, Airport Development Corporation, and Canadian Airports Ltd. [See: Committee Doc. 001114] The memorandum of the meeting with Paxport notes that:

"Paxport does not see need or usefulness of an EOI stage. The Government's criteria for a competitive process is satisfied by three proposals. There is clear evidence that there are three interested competitors so there is no need to open the process any further. There is a substantiative cost associated with preparing submissions for a two-stage process." [Doc. 001114]

This approach contrasted sharply with the positions of the other developers. Airport Development Corporation opposed any redevelopment of Terminals 1 and 2 at that time, arguing:

"TC's #1 priority should be runway capacity expansion.

ADC's basic position is that:

• the T1/T2 redevelopment should be deferred;
• the airline industry cannot afford a major new capital investment at this time;
• there is a surplus of capacity in T2 and T3;
• T1 should be mothballed and T1 carriers reassigned to T2 and T3." [Doc. 001114]

Canadian Airports Ltd. argued in favour of a two-stage process:

"CAL agrees with the two-stage proposal call approach, i.e. EOI & RFP.

Factors to be addressed at EOI stage:

• experience in terminal redevelopment work (only BAA and TC has that experience);
• track record in major projects/airport operations;
• experience in terminal operations, particularly with respect to safety and security matters during reconstruction." [Doc. 001114]

It is clear from the documents that Transport Canada recommended the use of a two- stage process, with an Expression of Interest stage before the Request for Proposals. [See, e.g.: "What are the various ways that a developer can be retained?", dated January 8, 1991, Committee Doc. 001063.]

Wayne Power, Director of Transition at Pearson Airport, confirmed to the Committee that "for the T1T2 project, there was a draft expression of interest prepared." [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:13; and see the draft "Call for Expressions of Interest," dated June 5, 1991, Committee Doc. 001060.] Such an expression of interest would have required "a detailed statement of the [proponent's] qualifications to undertake the project," which Mr. Power stated normally would include the experience of the developers on similar projects, including whether they had completed projects of that size or complexity before. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:13.]

Mr. Power and Mr. Gerry Berigan, now Regional Director for Airports, Atlantic Region, and formerly a senior executive in charge of the Terminal 1 and 2 redevelopment project in Ottawa, both testified that the decision to use a one-stage procedure, and to forego the expression-of-interest stage, was made by the Minister. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:9 and 6:13; and see Memorandum from L.A. McCoomb to V.W. Barbeau, dated August 21, 1991, Committee Doc. 001047, confirming Minister's "recent direction" that "there will be a single stage proposal call process, i.e. no Expression of Interest or Qualification stage."]

It is interesting to consider how Paxport would have scored under criteria such as those proposed by Canadian Airports Ltd. As the memorandum shows, Paxport had no experience in terminal redevelopment work; by their own statements, they had no track record in airport operations; and no experience in terminal operations, other than having submitted an unsuccessful proposal for Terminal 3. [See: Opening Statement of Gordon Baker, Committee Transcript , Wednesday, September 13, 1995, Issue No. 18, 18:5-9.]

At the very time when it was arguing that an expression-of-interest stage was unnecessary because three interested developers had been identified, Paxport was lobbying for the disqualification of the other two developers. Mr. Hession wrote Mr. Lewis repeatedly to "point out the serious pitfalls associated with the inclusion of foreign competitors in the development of Terminals 1 and 2 at Pearson International Airport." [See: Letter from Mr. Hession to Minister Lewis dated June 19, 1990.] While directed primarily at British Airports Authority, the main party in the Canadian Airports Ltd., Mr. Hession also extended this argument to Paxport's other main competitor, Airports Development Corporation, 27% of which was then owned by Lockheed. Mr. Hession was not subtle: "Today's foreign partner becomes tomorrow's competitor." [See: Letter from Mr. Hession to Mr. Lewis, dated June 29, 1990, Committee Doc. Ref.: 5700-1.35/P1-13, 1-1-#0271, emphasis in original document.]

Paxport advocated also that the Government "promote competition between terminal operators at Pearson for the benefit of improved service at competitive prices." [See: "Questions for Consideration," dated October 15, 1990, for meeting with Transport Minister Doug Lewis, Committee Doc. Ref.: 5700-1.35/P1-13, 1-2-#0280.] In other words, Airports Development Corporation should not be considered for the contracts for Terminals 1 and 2.

Paxport was partly successful in these representations. The RFP stipulated that to qualify, a developer had to be "Canadian as determined in accordance with the Investment Canada Act (R.S., 1985, c. 28 (1st Supp.)) and be controlled in fact by Canadians." This may effectively have kept Canadian Airports Ltd. from submitting a proposal, but clearly did not exclude Airport Development Corporation with its U.S. minority shareholder.<24> Ultimately, Paxport merged with the Terminal 3 group to form Mergeco (and then T1T2 Limited Partnership)<25>, so that it was fortunate, for Paxport, that its stand against monopoly control did not prevail.

Mr. Hession also repeatedly expressed his dismay over the delay to the process caused by the need to wait for the results of the environmental assessment review panel on the runway proposal. Mr. Lewis, as Minister of Transport, and Transport Canada officials had made a number of public statements to the effect that it was their intention to release the RFP only after the federal Environmental Assessment Review Panel issued its recommendations. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:15-16.] These statements were summed up in a May 16, 1991 memorandum written by Mr. Chern Heed, general manager of Pearson Airport:

"Clear commitments have been made to the public that no steps to expand the capacity of Pearson airport will be taken until after the results of the environmental assessment review is known." [Committee Doc. 001161, quoted at: Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:16, emphasis added.]

Nevertheless, as Mr. Berigan testified, for reasons not known to him, the RFP was issued on March 16, 1992, five months before the EARP report was released on November 30, 1992. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:16.]

The Committee saw a memorandum listing the "risks associated with issuing RFP prior to runway decision." That memorandum lists as an assumption, "EOI [Expression of Interest] has prequalified developers." It then goes on to list as the risks: "public perception of EARP/credibility; reaction of Panel itself; return to Crown likely diminished." [Document entitled, "Risks Associated with Issuing RFP Prior to Runway Decision," Committee Doc. 001071.] Nevertheless, the Minister directed not only that the Department proceed with the RFP without waiting for the results of the environmental assessment on the runways, but also that they forego any expression of interest, or prequalification stage. [See: Memorandum to Mr. V.W. Barbeau from L.A. McCoomb, dated August 21, 1991, Committee Doc. 001047, confirming "the Minister's recent direction with respect to the redevelopment of Terminals 1 and 2."]

The findings of the environmental assessment report were, however, very relevant to this project:

"(a) There is now no likelihood that passenger aircraft movement demand will reach the levels projected in the environmental impact statement for 1996 before the year 2001 and maybe even later;

"(b) There is no serious and continuing problem of traffic congestion at Pearson at the present. The problems with congestion virtually disappeared due to an improvement in the use of runways and a decline in demand caused by the recession;

"(c) A decision on runway expansion can be deferred for two to three years without significant risk." [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:17.]

These findings were immediately reported to the Prime Minister by Mr. Glen Shortliffe. [See: Memorandum for the Prime Minister dated December 4, 1992, Committee Doc. 002085.]

Thus we see that by 1992 the "crisis" at Pearson had ended. No longer was there a need for immediate action. Moreover, the Air Transport Association of Canada, an industry association of airlines and other commercial aviation interests in Canada, testified before the Committee that they made repeated representations to the Government that the Terminal 1 and 2 redevelopment project was not needed, and not wanted by the industry; it was neither timely nor appropriate. The first such representation was made by letter to Transport Minister Corbeil, dated September 6, 1991 -- fully six months before the RFP was issued. [Committee Doc. 00036]

When he testified, Mr. Gordon Sinclair, formerly President of the Air Transport Association of Canada, elaborated on his organization's position at that time:

"You will recall that we were in the midst of a very significant recession at that point [in] 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 [was] just too much uncertainty in the circumstances to warrant any other conclusion at that point [in] time." [ Committee Transcript, Thursday, August 17, 1995, Issue No. 13, 13:77.]

Two months later, on November 12, 1991, the membership of the Air Transport Association of Canada unanimously passed a resolution that said:

"BE IT HEREBY RESOLVED THAT ATAC make strong and immediate representations to the Minister of Transport and the Government of Canada to delay any consideration of redeveloping Terminal I at Toronto until the rate of recovery of passenger traffic is established and to postpone any redevelopment of Terminal II until the carriers using that Terminal identify such a requirement." [Committee Doc. 00038.]

This resolution was sent to Transport Minister Corbeil on November 29, 1991. Mr. Sinclair testified that he thought he received a reply the following May -- six months later, and two months after the RFP issued. [Committee Transcript, Thursday, August 17, 1995, Issue No. 13, 13:78.]

In the meantime, on March 5, 1992, prompted by information that the RFP was about to issue, Mr. Sinclair had sent another letter to Mr. Corbeil. That letter began:

"It has come to our attention that you will be issuing Requests for Proposals (RFP) to redevelop and operate Terminals 1 and 2 in Toronto.

"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." [Committee Doc. 00301]

The meaning of this statement was underscored when Mr. Sinclair was before the Committee:

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, a 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 these 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 someone else's money. [Committee Transcript , Thursday, August 17, 1995, Issue No. 13, 13:79, emphasis added.]

Air Canada also opposed the issuance of the RFP. Mr. Dominic Fiore, retired Senior Director, Corporate Real Estate, Air Canada, told the Committee:

"Of course, 1990 was the year the recession hit the airline business in Canada and around the world like a tidal wave. Air Canada began a very difficult process of cutting costs and downsizing. We dropped marginal routes, sold aircraft, deferred all capital expenditures and began laying off thousands of employees. Phase 2 of the terminal refurbishment was also downscaled from $250 million to $160 million and postponed until an improvement was apparent in Air Canada's finances.

"While Air Canada was in the early stages of downsizing, the federal government announced its intention to issue a request for proposal to redevelop Terminals 1 and 2. They also requested Air Canada's input on further improvements to Terminal 2 in order to provide specifications to interested bidders.

"While we provided our phase 2 plans, we, nevertheless, asked that the government postpone the request for proposals in light of our difficult financial situation and our inability to absorb high terminal operating costs." [Committee Transcript, Wednesday, August 16, 1995, Issue No. 12, 12:76.]

Even Claridge Properties Ltd., which ended up as the controlling partner in T1T2 Limited Partnership, wrote on November 13, 1991 to the Hon. Gilles Loiselle, President of the Treasury Board and Minister of State (Finance), opposing the issuance of a RFP for the redevelopment of Terminals 1 and 2. [Letter from Mr. Peter Coughlin, President, Claridge Properties Ltd., to the Hon. Gilles Loiselle, dated November 13, 1991, Committee Doc. 001137.] The letter noted that in opposing the issuance of a RFP, Claridge was joined by Canadian Airlines International, Air Canada, and the Air Transport Association of Canada.

Mr. Coughlin concluded his letter with a review of the sharply reduced traffic levels at Pearson Airport: "Traffic at Pearson is currently running at 1987 levels. With the opening of the T3 satellite terminal in December 1991 and the major renovations recently completed at T2, there is adequate terminal capacity at Pearson, WITH T1 MOTHBALLED, for another 6 to 7 years." (Emphasis in original document.) He then offered:

"In addition and should everyone's predictions be horribly inaccurate, the owners of T3, at their own cost, would make the necessary arrangements to develop the other half of Pier B which is currently not in use. This would be done in a matter of months, at no cost to the Government and would provide ample capacity beyond the year 2000." [Letter from Mr. Peter Coughlin, President, Claridge Properties Ltd., to the Hon. Gilles Loiselle, dated November 13, 1991, Committee Doc. 001137, page 4, emphasis added.]

The Conservative Member of Parliament for Mississauga South, Mr. Don Blenkarn, wrote to Transport Minister Corbeil on March 13, 1992, protesting the proposed redevelopment project at Pearson Airport. He contended first that, "on the current volume and, indeed, on projected volumes nearly to the year 2000 there is no conceivable need for further airport terminal expansion. Indeed, unless there are new runways there is no need whatsoever for substantial terminal improvement or expansion other than regular maintenance and regular upkeep."

His letter continues:

"What comes through to all sorts of people critical of our government is some sort of a quick pay off to friends who want to develop airports and it doesn't taste well and it doesn't sound well and it leaves all sorts of suspicions and it doesn't add up or balance.

"As Terence Corcoran [of the Globe & Mail] ... says, "Privatization is desirable, but the framework outlined so far is much too sketchy." So sketchy in fact as to be seriously damaging to our credibility. So sketchy in fact as to be indefensible. In my view, nothing destroys political credibility more than to do something that does not have a balance in the mind of the public. The problem here is important to me and to our other members in Mississauga. Within a year or so we are going to be asked to run for re-election in Mississauga, and when things are done in our city that stretch our credibility and the credibility of the government, it just makes things very much more difficult for us.

"Dr. Horner, Mr. Chadwick and I know the close relationships that of [sic] number of the proponents of airport reorganization and their relationship with our Party and how supportive they have been in the past. In our view, the name of the game is to get elected. Overwhelming interest is to make sure that our constituents, and the country generally, are well governed and the whole proposal at this point does not balance and our detractors clearly know that." [Committee Doc. 000996]

On the other side of the House, Mr. Jean Chrétien, then Leader of the Opposition, adamantly opposed the decision to issue the RFP, and denounced the atmosphere of patronage already in evidence. He asked the Minister of Transport a question during Question Period on March 12, 1992; the Minister was careful to avoid the patronage issue in his response:

Hon. Jean Chrétien (Leader of the Opposition): The government has announced that it is rushing ahead with plans to privatize terminals 1 and 2 at Pearson airport, an airport that makes a $100 million profit every year. The airline, the province, the regional governments say: "We do not need it".

I want to know from the Minister [of Transport] why he is going ahead with this when everyone says that it is not needed. Why does he want to give $100 million of profit to the private sector at the expense of the government?

. . .

The minister has now said that developers will have 90 days to come up with proposals for taking over these terminals. Canadians should know that one company, Paxport, has a major head start. It even had a scale model of a proposed new terminal airport on display at the Rideau Club for members of Parliament two years ago. A principal in that company is Don Matthews, a former chairman of the PC Party and fund raiser for the Prime Minister in his leadership bid.

We all know that the Prime Minister likes to roll the dice. Can the minister assure us that in this case he is not loading the dice for his friends?

Hon. Jean Corbeil (Minister of Transport): Mr. Speaker, we should perhaps recall that when submissions to build terminal 3 were requested, the person that the Leader of the Opposition just referred to was one of the bidders, but he did not get the contract. Instead, the contract was awarded to friends of the Liberal Party. [House of Commons Debates, March 12, 1992, p. 8121-22.]

The next day, the issue was raised again in Question Period, this time by Mr. John Manley:

Mr. John Manley (Ottawa South): ... Why does the minister not remove the foul odour of political favouritism and opportunism from the timing of the announcement of this project and do what Mr. Sinclair from the airline association suggested and simply wait until 1993 when we see how the airline industry shakes down?

. . .

Madam Speaker, what is not clear is who is making the decisions for Transport Canada on this issue. [House of Commons Debates, March 13, 1992, p. 8183.]

And as he did the day before, Mr. Corbeil declined to deal with the question, except to say, "We have taken notice of [Mr. Sinclair's] objection." With respect to the questions about patronage, again the minister declined to answer. [House of Commons Debates, March 13, 1992, p. 8183.]

Issuance of the RFP

Despite these many representations and pleas, the Government issued the Request for Proposals on March 16, 1992. The RFP stipulated a 90-day period to respond. Documentation produced for the Committee reveals concern within Transport Canada that this period was too short. In a memorandum dated October 29, 1991, Mr. Chern Heed, general manager of Pearson Airport, wrote to Mr. Barbeau:

"We still are concerned about the perception created by the very short time period for RFP responses (90 days) vis-à-vis the integrity of the process. This concern has been reinforced by the observations of Price Waterhouse, the consulting firm engaged to assist in preparation of the Request for Proposals. Price Waterhouse (without prompting) has commented that, notwithstanding that the Department may consider requests to extend the response time, publication in the RFP of a 90 day response time for proposals could convey the message that the Department is not committed to a fully open and competitive process.

"The number and complexity of the issues to which proponents must respond with mature and firm proposals require a response period of not less than six (6) months. Also, if any groups other than the three who have already prepared preliminary proposals become involved, a request for an extension beyond six months would not be unexpected. We hope that there will be an opportunity to reconsider the matter of the published RFP response time." [Committee Doc. 000639, emphasis added.]

Mr. Wayne Power also testified that the 90-day response period would have acted as a constraint on new groups seeking to submit proposals. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:38.] Mr. Power told the Committee that the issue of the reasonableness of the 90-day period was the subject of discussion at several meetings in that period. He noted that this proposal was a more complex proposal than that for Terminal 3, although the response time allowed for the Terminal 3 RFP was four and a half months. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:17-18.] (In fact, as we have seen, Terminal 3 used a two-stage process, and the total time between the calls for expressions of interest and the due date for proposals on the RFP was seven months. [Committee Transcript, Wednesday, July 12, 1995, Issue No. 3, 3:27.])

In fact, Paxport had lobbied strenuously for a short response period. For example, when Mr. Hession wrote to Mr. Lewis on October 22, 1990 to discuss the forthcoming Request for Proposal, he enclosed a list of questions "intended more to focus attention on concerns peculiar to the situation." The first question was:

"In light of the unsolicited proposal activity and the notice given by the Minister's announcement on October 18, 1990, is it the department's intention to foreshorten the time for the bidders' proposal preparation and response to, say, 6-8 weeks in order to hasten the evaluation and decision process?" [See: Attachment to letter from Mr. Hession to Mr. Lewis, dated October 22, 1990, Committee Doc. Ref.: 5700-1.35/P1-13, 1-2-#0281.]

Despite the concern voiced by the independent consultants engaged by the Government to prepare the RFP that its response period was too short, the Government stuck to the 90-day deadline. Mr. Power testified that this decision was made directly by the Minister:

Mr. Power: We received direction from the minister that the response period would be 90 days. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:34.]

This testimony is confirmed by a review of the documents produced for the Committee. A memorandum of August 21, 1991 supports Transport Canada officials' understanding of "the Minister's recent direction with respect to the redevelopment of Terminals 1 and 2." It includes: (1) direction to proceed with "a single stage proposal call process, i.e. no Expression of Interest or Qualification stage;" (2) "the RFP will require that proposals be submitted 90 days from release of the RFP;" and (3) "the RFP may be released prior to completion of the EARP review of the Department's proposal to construct new runways at LBPIA." [Memorandum from L.A. McCoomb to Mr. V.W. Barbeau, dated August 21, 1991, Committee Doc. 001047, emphasis added.]

Eventually, the 90-day period was extended at the request of Claridge, for 30 days. However that extension was requested half-way into the original 90-day period. That is, other parties who may have considered entering the contest but were dissuaded by the short response time, were not helped by this extension. The extension was for a further 30 days.

Mr. Allan Crosbie, a financial advisor who assisted Mr. Nixon in his review of the Pearson Airport deal, was concerned about the "process and the rigour with which Transport Canada identified bidders; and it came through to us as not a terribly professional and sophisticated process of identifying bidders." [Committee Transcript, Wednesday, September 27, 1995, Issue No. 26, 26:81.] He went on to criticize the way the RFP was presented, suggesting it was not presented in a way calculated to excite interest in most potential bidders:

"[T]here is a way to present deals to enhance your interest as a seller, in this case the government was the seller, and if you look at the RFP it is a very dry document.... It is not a package that is written from the point of view of explaining to somebody why this is an attractive deal in setting forth the deal and how they are going to make some money and how they can finance it and the amount of money they can make and all the advantages. So that the packaging [of the RFP] was not the kind of packaging that you would see if you were really trying to do a deal and maximize value and interest people in what you've got.

. . .

"[S]econdly, you have got to have a very strong process to identify bidders, create bidders, approach bidders, show them how they should do the deal, help people in the consortium to get together. And, once again, I don't think that was done and that was in our mind anyway -- ... In our mind that was confirmed and was told to us by officials from Transport Canada." [Committee Transcript, Wednesday, September 27, 1995, Issue No. 26, 26:81-82.]

This testimony conforms with the evidence presented to the Committee: the Government was satisfied that two or three interested parties had made themselves known, and did not worry about trying to seek out others. Of course, the RFP by its terms may have disqualified one of these parties (British Airports Authority). The final result was that the other two parties merged.

The Role of an LAA Under the RFP

The RFP was ambiguous as to whether or not a LAA was qualified to respond. Mr. Gardner Church told the story:

"When the decision was made by the federal government to proceed with the call for proposals... the provincial government agreed to underwrite, if necessary, a bid that was designed to return the policy control of the airports to the public sector[.]

. . .

"[A]n initial effort that might have produced a credible bid was undertaken. It became obvious almost instantly that given the nature of the call for proposals, which required very detailed drawings and detailed electrical analysis as to what one would do with communications facilities, with the administration building, with a variety of other issues, that a complete proposal in that time frame would be very difficult.

"Nonetheless ... an enormous effort [was made] to make it happen. It really was not until they were informed by the federal government that their bid would not be accepted because of what they perceived as provincial involvement that they turned their material over to another group which ultimately did put a bid in on their behalf." [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:24-25.]

Mr. Meinzer stated later that "it was not clear to us, and we tried to get a clear answer, whether an airport authority was even permitted to bid. To this day, I do not know a clear answer to that question yet, whether an airport authority was in the end actually permitted to bid or not." [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:27.]

What these individuals did not know about at the time, was the lobbying effort conducted against them by Paxport. At meetings with Transport Canada officials, Mr. Hession argued that, "Municipalities and prospective Local Airport Authority (LAA) candidates should be precluded from bidding." [Memorandum from Mr. Ray Hession to Mr. Don Matthews, Mr. Jack Matthews, Mr. Lorn Sinclair and Mr. Trevor Carnahoff, dated April 16, 1991.]

Mr. Hession later reported to his employers that Transport Canada "officials affirmed that proposals from municipalities, whether alone, in groups or in joint ventures with private interests will not qualify under the forthcoming proposal call for Terminals 1 and 2." [Memorandum from Mr. Ray Hession to Mr. Don Matthews and Mr. Jack Matthews, dated May 14, 1991.]

Paxport and the RFP

In the meantime, Paxport was preparing its response to the RFP. Mr. Hession provided the Committee with notes he had distributed for a Paxport strategy session. These give insight into Paxport's understanding of its position relative to its competitors. [See: Memorandum from Mr. Hession to Mr. Don Matthews, Mr. Jack Matthews and four others, dated March 19, 1992.]

Those notes rate Paxport's competitive assessment vis-à-vis the anticipated competitors. The assessment varies from "weak," "OK," to "strong." Even at this stage, Paxport itself assessed its financial position as weak; next to the criteria, "Adequacy of proposed financial arrangements to ensure completion of the development phase," Mr. Hession entered "Weak." Similarly, Paxport's "financial planning experience and financial capability" were graded as "weak;" likewise its "ability to raise equity/debt on favourable terms."

Switching Sides: Mr. Andy Pascoe

While it was preparing for the RFP, Paxport acquired a new employee, Mr. Andy Pascoe. He came to Paxport from the office of the Hon. Doug Lewis, where from March 1990 until April 1991, while Mr. Lewis was Minister of Transport, Mr. Pascoe had served as his Special Assistant, Aviation and Airports, acting "as a liaison between the Minister and Transport Canada officials on policy issues surrounding airport mangement and operations." He told the Committee that while at Transport Canada, he was responsible for "a wide range of files pertaining to Pearson Airport." [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:37.]

The evidence shows that Mr. Pascoe, representing the Minister's office, attended meetings with each of the potential developers for Terminals 1 and 2. [Committee Doc. 001114] Mr. John Desmarais testified that "all the unsolicited proposals we were looking at were sent to the minister's office and then subsequently sent to the deputy." [Committee Transcript, Tuesday, August 15, 1995, Issue No. 11, 11:84.] In the circumstances, it is evident that Mr. Pascoe had access to confidential information about Paxport's competitors, possibly including information about the unsolicited proposals submitted by each, and their strengths and weaknesses as perceived by Transport Canada officials.

It is also evident that Mr. Pascoe had access to inside information about the priorities and concerns of the department with respect to the Pearson redevelopment project. All this information could give Paxport a "competitive edge" in preparing and submitting its proposal -- to say nothing of the appearance of conflict arising from the possibility that Mr. Pascoe had not cut all ties to the Transport Minister's office and officials in the department.

Whether or not technically Mr. Pascoe's actions violated the Conflict of Interest and Post-Employment Code for Public Office Holders was not an issue before this Committee. However, we have serious concerns about the fairness of a process that allows an influential insider -- the person from the Transport Minister's office who was responsible for briefing and advising the Minister on the redevelopment project -- to join one of those firms bidding for the contract.

Evaluation of the Proposals: Setting the Criteria

At the end of the Request for Proposals stage, there were only two qualified proposals: one from Paxport Inc.; the other from Airport Terminals Development Group ("ATDG"), in which Claridge was the dominant party.<26> These proposals were evaluated by a committee of Transport Canada officials headed by Mr. Ron Lane. Here again, the Minister of Transport's personal attention to this file was clear. Mr. Lane told the Committee that "the evaluation committee here I know was approved by the minister.... The weighting, if you like, and the complete evaluation documentation, was presented. The minister requested to see it. It was delivered to him." [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:59.]

The Minister of Transport had in fact participated actively in setting some of the evaluation criteria. Internal Transport Canada memoranda show that the Minister personally directed that certain points be taken into account in the evaluation process:

"This is to confirm my understanding of the Minister's recent direction with respect to the redevelopment of Terminals 1 and 2:

. . .

(g) Industrial benefits including Canadian content and enhanced export potential are to be included in the project evaluation. The precise weighting for this "non-airport" related factor and the method of its evaluation are to be determined in consultation with other departments prior to the commencement of the evaluation.

(h) [ATIP deletion] Thus, a detailed "Crown Construct" terminal design and financial analysis to serve as the basis for comparing the public versus private sector alternatives will not be undertaken. Rather the value of the T1/T2 development opportunity to the Crown is to be assessed by a qualified Management Consulting firm and will serve as the basis for evaluating alternatives." [Memorandum from L.A. McCoomb to V.W. Barbeau, dated August 21, 1991, Committee Doc. 001047.]

Paxport's lobbying had paid off. It had lobbied hard to persuade the government to "use the project as the basis for the creation of a viable Canadian airport development industry to promote both domestic competition and international market development." [See: "Questions for Transport Canada" appended to letter to the Hon. Doug Lewis, Minister of Transport, from Mr. Hession dated October 22, 1990, Committee Doc. Ref: 5700-1.35/P1- 13, 1-2-#0281.] As discussed earlier, Paxport had lobbied hard to have the "return to the Crown" weighted very heavily in the evaluation.

And the Minister decreed that the Government would not undertake a detailed "Crown Construct" model to be used for comparison purposes. In other words, the evaluation committee (and indeed the Government) would not be in a position to compare the proposals with an alternative whereby Transport Canada itself would undertake the redevelopment.

This was a point that puzzled us considerably during these hearings: why was there no base case study as to what would happen if Transport Canada itself effected the necessary redevelopment? The answer was buried in the documents: because the Minister of Transport ordered that no such study be undertaken.

It is clear from the documents produced for the Committee, that Transport Canada felt that the lack of such a base case study severely undermined the value of the Evaluation Report on the proposals. An internal memorandum dated November 3, 1992, observed:

"The Proponent's Proposal would imply an attractive financial return to the government if all of its assumptions and conditions were realized. However, the Evaluation Report has made no comparison of the return to the government under the Proponent's proposal with a 'business as usual' assumption under a continued government operation of the airport. A so-called government base case was not undertaken as a part of the RFP exercise....

"Without a reasonable base case, based on "common methodology and assumptions," a determination cannot be made with confidence on whether the Proponent's proposal would leave the government no worse-off financially than it otherwise would have been had it continued to operate the terminals. " ["Considerations Related to the Potential Redevelopment of Terminals I and II," dated November 3, 1991, Committee Doc. 001445, emphasis added.]

Mr. Lane elaborated on the weightings given during the evaluation, testifying that the qualifications of each proponent was only 5 per cent of the weighting. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:60.]

Accordingly, the financial qualifications of each proponent -- their ability to deliver on their proposal -- was barely considered in the evaluation process. Ultimately, this proved to be a fatal error: those who made the preferred proposal were not financially competent to deliver what they had proposed.

At the same time, the return to the Crown under each proposal was weighted very heavily; of the 40 per cent points assigned to the business plan, 50.6 per cent was allocated to the proposed return to the Crown. [See: "Proposal Evaluation Report," Committee Doc. 001765.]

Evaluation of the Proposals: The Report

The Evaluation Report noted that Airport Terminals Development Group (or Claridge) "has submitted a sound, conservative and achievable Business Plan, which recognizes the current financial realities of the airline industry in establishing a pricing strategy (low charges for the short-term, 1 - 8 years or so, rising only after Phase 1 construction is completed in 1998)." [Committee Doc. 001765, p. 90]

By contrast, Paxport "has ... chosen a far more generous approach to determining payments to the Crown, resulting in a very high return to the Crown. However, the critical assumption in the Business Plan is that a large portion of the capital costs as well as the payments to the Crown can be passed on to the airlines, and that it will be possible to renegotiate airline leases to conform to their pricing strategies and levels." [Committee Doc. 001765, p. 90]

The Report noted that, "Any of these matters could result in [Paxport] having to scale down the scope of the project or to delay redevelopment, particularly Stage 1. They could also cause reductions in payments to the Crown, as well as bring into question the financial viability of the proposal." [Committee Doc. 001765, p. 90]

The Report also recognized that the Paxport proposal would entail significant cost increases for the air carriers -- costs that the air carriers would then pass on to the travelling public:

"The major share of capital costs and increased operating costs (including payments to the Crown) due to terminal expansion will be allocated to air carriers. The PAXPORT revenue projections indicate that these costs will double from approximately $30M to $60M in the first year of the lease and increase by a factor of 4 during the first ten years of the lease...While recognizing the development must recover its costs and provide a reasonable return to the investors, both the amount and rapidity of increases to air carrier costs could be criticized by both domestic and international air carriers." [Committee Doc. 001765, p. 108-9.]

What emerges is that even as the Evaluation Report was being written, Transport officials saw potential problems in the Paxport proposal. That proposal was based on the assumption that the developer's costs, including the high return to the Crown that won the proposal's selection, could be passed through to air carriers, who in turn would pass them on to the travelling public. Thus, the travelling public would be subsidizing both the Crown's return and the costs -- and profits -- of the developer. It is notable that the Evaluation Committee were explicit in their Report that "any of these matters could ... cause reductions in payments to the Crown, as well as bring into question the financial viability of the proposal."

Nevertheless, the Evaluation Committee, adhering to the criteria, found the Paxport proposal the "best overall acceptable proposal." It also found the Claridge proposal acceptable. As became apparent under questioning, the likely impact of the proposals on the travelling public was not taken into account in the evaluation process. [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:72.]

Evaluation of the Evaluation Report:

(1) Raymond, Chabot, Martin & Paré "Process" Audit

The Evaluation Committee report was subjected to an independent audit by an outside firm, Raymond, Chabot, Martin & Paré. However, it emerged from the testimony that these auditors were given a very restricted role. Mr. Robert L'Abbé, the author of the Raymond, Chabot report, was very clear when he testified: "We did not make any evaluation whatsoever.... [T]he only thing that we did is to see that every question was answered and that the methodology that was first prepared before the committee took over to make the evaluation has been followed..." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:56.]

Thus, while two levels of "auditors" were imposed on the Terminal 1 and 2 process -- the Raymond, Chabot firm and the Price, Waterhouse one, which guarded the documents -- neither level of "auditors" was empowered to question the validity of the process which the Government had put in place. They simply enforced the letter of the process they were given.

(2) Financial Assessment: The Edlund Report

Mr. Harry Swain, Deputy Minister of Industry, Trade and Technology, told the Committee that in the fall of 1992 "my then minister, the Honourable Michael Wilson, became concerned about the negotiations over Pearson. Specifically, he was concerned with the financial competence of the bidders to perform on the long-term obligations being contemplated, and he asked me for information and advice." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:5, emphasis added.]

Mr. Swain told the Committee that he discussed the matter with the Deputy Minister of Transport, Dr. Huguette Labelle, who agreed to allow two Industry Canada experts to have access to the records. Ms. Connie Edlund, C.A., Acting Director, Small Business Loans Administration, Industry Canada, undertook the job in October, 1992. She testified as to her conclusions:

"Basically, our findings were as follows: In terms of financial soundness, we felt that the ATDG proposal was preferable. Our concerns with the Paxport proposal were numerous. One of them was that the amount of equity in the Paxport proposal appeared insufficient and was significantly less than that proposed by ATDG.

"Furthermore, over $39 million of the equity was to come from public offering in 1996, which may or may not have been feasible. They had forecasted that dividends of 10 per cent payable to the shareholders were forecasted to start immediately. A large portion, I think 16 per cent, of the capital costs were to be financed from internally generated cash flows from operations.

"The forecast revenues appeared overly optimistic. If circumstances did not unfold as forecasted, for example, in the event of capital cost overruns, failure of the public offering, operating cash shortfalls or something of this sort, we did not feel that the shareholders, particularly Matthews Group, the largest shareholder, would have the necessary financial resources to make up the difference. We felt that Paxport's forecasted management fees seemed very high." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:6-7, emphasis added.]

Ms. Edlund subsequently elaborated on the management fees issue: "I think it goes without saying they seem to be very, very high, extremely high." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:23.] She said:

"Well, the management fees, this is one that kind of got us a little bit. Because we started looking at it, and I believe in one of the schedules that support it, it actually shows the definite increase. In fact, I think if you look to the second last page of the report, it talks about the escalation in management fees that would be paid, and it increases substantially.

"We saw through the ATDG proposal it increased approximately 15 per cent being charged across the board, which seemed somewhat reasonable to us. However, we increased on Paxport the management fees as total rose from 1993 at 24 per cent to 1998 to 42 per cent and staying constant at 42 per cent. We felt that was quite high. So we made note of that.

"So we brought that up basically as a question, because certainly that combined with the dividends being paid out at 10 per cent and 42 per cent management fees, when you have a somewhat fragile situation concerning revenue projections and little bit of equity, we felt that on a financial basis that led us to be somewhat nervous." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:10.]

The Edlund report observed that, "If Paxport's cash flows are generated at the rates it is forecasting, then these high levels of management fees will be of no concern. When taken with the shareholders' high dividend demands, however, they are, perhaps, an indication of rapacity." [Committee Doc. 002108, p. 4.]

Ms. Edlund observed in her testimony that Paxport lacked extensive experience in the airport development area -- her report noted that Paxport was "a company with few tangible assets and no real operations" -- which in her experience was a factor worthy of consideration. [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:17-18.]

When he testified before the Committee, Mr. Jack Matthews acknowledged that he lacked any experience in operating or redeveloping airports. His only exposure to airports came from preparing the proposal for Terminal 3. He told the Committee that most of the meetings he attended to lobby for support of Paxport's proposal would begin with people asking, "Jack, what business do you have in the airport business?" And his only response was to point to his unsuccessful attempt to win the Terminal 3 contract. [Testimony of Mr. Jack Matthews, Committee Transcript, Thursday, September 21, 1995, Issue No. 22, 22:130.]

Ms. Edlund's report also reviewed the financial state of the various proponents. With respect to the Matthews Group, it noted that "Since its inception in 1953 the company has never reported an annual loss, but in the past two years it has barely broken even and at Dec. 31/91 its debt (current plus term) totalled nearly $250 million." [Committee Doc. 002108, emphasis in original document.]

Ms. Edlund elaborated upon this point to the Committee: "We felt that [Matthews] were pretty tenuous at that point and time.... Basically, we are a little concerned too because given the economic situation at that point and time, we didn't see an awful lot of huge upturn in sort of the business that they were in, so that led us to be a little concerned, and obviously that is borne out to be true." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:18.]

Ms. Edlund's concerns were well founded. The Matthews Group was petitioned into bankruptcy on February 9, 1994.<27>

Ms. Edlund's report noted also that the Paxport proposal was demanding an "exclusivity" clause, "that guarantees [Paxport] that there will be no diversion of aircraft to other airports unless Lester B. Pearson International is maintained at full capacity. We did not see a similar demand in the ATDG proposal. We have no way of knowing if such a clause is reasonable or acceptable to Transport Canada." [Committee Doc. 002108, p. 4]

Ms. Edlund expressed her concern that while guaranteeing Paxport's revenue streams, this would create "a monopoly situation." [Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:13.] It also would have made it impossible to develop the Mount Hope Airport in Hamilton -- a goal identified in the 1989 Government Strategy for the Future of Aviation in Southern Ontario, pursuant to which the Terminal 1 and 2 redevelopment project had been initiated. [Minister's Press Release No. 98/89, August 18, 1989.]

(3) Financial Assessment: The Gauvin Report

In mid-November, 1992, the Deputy Minister of Transport received yet another study on the Paxport proposal, this one from Mr. Paul Gauvin, Assistant Deputy Minister, Finance and Administration at Transport Canada. This study was "an estimate of the financial implications, for the Crown. of redevelopment and continued operation of T1 and T2 by Transport Canada," compared to "the impact of accepting the offer made by Paxport." [Letter from Mr. Paul Gauvin to Dr. Labelle, dated November 13, 1992, Committee Doc. 001520.]

Mr. Gauvin summarized the conclusions of this study by saying that:

"[T]he Paxport proposal, as it now stands, would certainly leave the Crown better off financially, but only at a very high cost to the airlines and travelling public." [Letter from Mr. Paul Gauvin to Dr. Huguette Labelle, dated November 13, 1992, Committee Doc. 001520, emphasis added.]

Notwithstanding all the concerns raised both internally and externally, the Government accepted the Paxport proposal. And indeed, an internal Treasury Board memorandum from this period observed cryptically: "This may be a done deal." [Interoffice Memorandum from Bill Cleevely to six Treasury Board officials, dated November 26, 1992, Committee Doc. 001267.]

The Announcement, December 7, 1992: Selection of the Paxport Proposal

The first evidence before the Committee of direct involvement by Prime Minister Brian Mulroney in this project is a memorandum to him from the Clerk of the Privy Council, Mr. Glen Shortliffe. That memorandum, dated November 16, 1992, reported on the status of the RFP process at that time, three weeks before the announcement of the selection of the Paxport proposal. Mr. Shortliffe wrote to the Prime Minister:

"Transport has identified a number of issues to be considered before proceeding:

• the recession is continuing longer than expected and traffic may decline due to the current airline industry situation so the need for the expanded terminal space has slipped 2 to 3 years. There is no need to start construction until 1996.
• it had originally been expected that construction might start next year. Transport's current estimate is now 1994 at the earliest as it will take a minimum of 12 months to negotiate the lease. Paxport will have to negotiate new leases with the carriers and other T1/T2 tenants and arrange financing before signing the lease;
• Carriers' costs would double to $60 million in the first year and increase by a factor of four in ten years. Air Canada has asked that the redevelopment be postponed.
• a Local Airport Authority (LAA) may be established for Pearson. The five regional chairmen, led by Metro Toronto, have written to Mr. Corbeil indicating their intention to proceed with the LAA process. The LAA would assume any lease for T1/T2. There may be pressure from the province for a postponement until the LAA can be established.

"The successful developer, Paxport, has made an unsolicited proposal for an early start of the project. For an unspecified nominal payment, it would be assigned the $20 to $30 million in rent from existing concessionnaires for 40 years in exchange for $150 million in work which would start next year. There is concern with the inequity of the arrangement (over $1.0 billion in revenue in exchange for only $150 million in work) and the negative impact it would have on government revenues (the lost $20 to $30 million in annual revenue would affect the deficit). As well, access to the concession revenue represents the main incentive to complete the development. With immediate access, Paxport will have little incentive to complete the project on terms acceptable to the federal government." [Memorandum for the Prime Minister from Glen Shortliffe, dated November 16, 1992, Doc. 002188.]

At the bottom of the Novemer 16, 1992 memorandum to the Prime Minister is a handwritten note which reads:

"Prime Minister: As the material indicates, there are few incentives for the bidders to get together. As discussed last Thursday, I'm looking at bid compensation."

So we see that that three weeks before the Minister of Transport announced that Paxport's proposal had been selected for the project, the Prime Minister was aware that no construction was required for four more years; that air carriers' costs would quadruple under the terms of the proposal; that Air Canada had requested that the project be postponed; that the province wanted to wait until an LAA could be established, and that was imminent; and that the arrangement was inequitable -- "over $1.0 billion in revenue in exchange for $150 million in work," all of which would have a "negative impact ... on government revenues" and affect the Government's deficit.

Furthermore, the Prime Minister and the Clerk were discussing the possibility of the bidders "get[ting] together" -- something that the parties testified was not contemplated by themselves until after the announcement on December 7.

Mr. Shortliffe provided the Committee with a curious explanation of his handwritten note:

"It is not infrequent for Prime Ministers to ask questions of the Clerk. This is an instance where I was responding to a question that I had been asked by Prime Minister Mulroney. It came about basically in the following fashion. Before this memorandum was prepared, the Prime Minister knew from me orally that the best overall proposal emerging from the evaluation process was indeed Paxport. He knew that because I told him that orally.

"It so happened that a couple of days before this memorandum was prepared the Prime Minister was at a social function and at that social function he encountered Charles Bronfman.... [O]f course, at that time no announcement had been made as to who had won the best overall proposal; and Mr. Bronfman, as I understand it, in the course of their social discourse, made, frankly, a pitch at the Prime Minister about the importance to Claridge of winning the bid for Pearson redevelopment.

"As a result of that discussion, the next morning when I met with the Prime Minister, the Prime Minister asked me whether or not there was any possibility that once the announcement was out that the two could be -- would -- could come together so that everybody could get a piece of the action." [Committee Transcript, Monday, September 25, 1995, 1400-9, emphasis added.]

And several days after "the announcement was out," it came to pass that the two proponents did "come together so that everybody could get a piece of the action." The Prime Minister's hopes were realized.

The Prime Minister's involvement with this project seems at times to have exceeded that of the Minister of Transport. Mr. Corbeil told the Committee, in forceful terms, that he had "absolutely no memory, no knowledge, no indication" of a possible merger between the parties, until the merger was announced. [Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:24.]

It was also clear from Mr. Corbeil's testimony that the Prime Minister's desire to try to provide compensation for the bidders if the redevelopment project was cancelled was addressed by the Clerk without consulting or involving the Minister of Transport. [Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:24.]

On December 4, 1992, three days before the announcement, Mr. Shortliffe sent another memorandum to the Prime Minister. [Committee Doc. 002184] This memorandum reiterates the point that "the redevelopment of the terminals may impose a significant financial burden on the airline industry at a time when it is in financial difficulty." This memorandum also discusses Paxport's financeability problems, and in particular the possibility that Paxport would return to the Government "within a matter of weeks," saying that their proposal is not workable. Mr. Shortliffe wrote:

"There are concerns that Paxport may not be able to confirm the financing of the project as it effectively requires the consent of Air Canada, the principal T2 tenant, who is known to be opposed to the redevelopment. Hence, within a matter of weeks Paxport could very well be back to us indicating that their proposal is not workable under current circumstances in the airline industry. At that point the government would have to consider putting the whole project on hold until a later date."

At this point, Mr. Shortliffe inserted an asterisk, with the handwritten comment:

"PM: However, the government could consider other alternatives."

Mr. Shortliffe noted also in the memorandum that "ATDG would of course be arguing publicly that their proposal could have been financed."

We are compelled to ask why, in these circumstances, the Government decided to proceed with the selection of the Paxport proposal. It is clear from these memoranda that Transport officials were pointing out the general problems with proceeding at that time, and, even worse, the problems that would arise from selecting the Paxport proposal over that of ATDG.

It is equally clear from these memoranda that the matter was placed squarely before the Prime Minister. And yet while the Prime Minister was kept apprised by the Clerk of concerns within the Department of Transport and the fact that the government might "have to consider putting the whole project on hold until a later date," the Minister of Transport told the Committee that he never discussed delaying the project to a later date:

Senator Bryden: As of the 4th of December, as the minister responsible, had any discussion ever taken place that you would have to put the whole project on hold for a later date?

Mr. Corbeil: No, sir. [Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:24.]

As Senator Michael Kirby observed in the course of Mr. Corbeil's testimony, "The minister was not in the loop." [Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21: 78.] The same cannot be said for the Prime Minister.

IV. Financeability Problems: The Emergence of Mergeco

On December 7, 1992, Mr. Jean Corbeil, Minister of Transport, announced that the Paxport proposal was "the best overall acceptable proposal" for the redevelopment of Terminals 1 and 2. However, neither the announcement nor the letter to Paxport was unconditional in its endorsement of the proposal. Both required Paxport to "demonstrate to the satisfaction of the government by February 15, 1993 that [Paxport's] proposal, in the circumstances, is financeable." [Letter from Victor Barbeau to Ray Hession, President, Paxport Management Inc., dated December 7, 1992, Committee Doc. 001844.]

The effect of this decision was to put Paxport in a vested position. Although Paxport's ability to carry out its proposal was uncertain, the Government had announced that it was going to negotiate a deal with Paxport and with no one else. At the same time, Claridge would have to go to Paxport unless it was to forego the benefits of having all three terminals operated by it or by a friendly company -- which Claridge told the Committee was its sole motivating factor in acquiring majority control of Terminal 3 in the first place.

Paxport quickly discovered that it could not raise the necessary financing. Mr. Jack Matthews told Mr. Robert Nixon "that he had gone up and down Bay Street looking for finance, that he had gone to the banks, that he had gone to the pension funds and had been unsuccessful in raising the financing that he sought." [Testimony of Mr. Robert Nixon, Committee Transcript, Tuesday, September 26, 1995, Issue No. 25, 25:72.]

For a few days in December 1992, things moved rapidly as the two competing bidders were getting together to form a new company, Mergeco. But how these two parties came together remains mysterious. The Committee originally heard two somewhat inconsistent versions of the origin of Mergeco. The documentation raises questions about the veracity of these accounts.

According to Mr. Ray Hession, former President of Paxport, "within two or three days of the announcement of the award," a "senior official from Transport Canada" approached Mr. Hession and suggested Paxport "should explore the synergies with the Terminal 3 owners." [Testimony of Ray Hession, Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:46, 44.] It was evident when he testified that this was Mr. Hession's understanding of the origin of Mergeco.

When he testified, Mr. Hession refused to disclose the identity of this senior official, citing a personal pledge that forbade him to identify the person. [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:44, 46.] However, several months later he wrote to Mr. John Nelligan, legal counsel to the Committee, and said that it was Dr. Huguette Labelle, then Deputy Minister of Transport, who had made this suggestion. [Letter from Mr. Hession to Mr. Nelligan, dated November 9, 1995.]

Every Government witness acknowledged that this file was an important, high profile one for the Government, one which was being supervised very closely by the Privy Council Office, as the documents demonstrate. It strains credulity to believe that on this closely- watched file, a senior civil servant would take it upon herself to approach the only two proponents, and suggest they explore the "synergies" of merging -- unless, of course, that civil servant was directed to do so, or understood that, at least, she had the blessings of those "higher up."

Meanwhile, both Mr. Peter Coughlin, President of Claridge Properties Ltd., and Mr. Don Matthews, Chairman of the Matthews Group of companies, testified that the merger had its genesis in a telephone call from Mr. Matthews to Mr. Bronfman on "the 10th or 11th of December," in which Mr. Bronfman proposed a merger between the two companies. [Committee Transcript, Tuesday, September 12, 1995, Issue No. 17, 17:21.] While Mr. Hession's letter explains that this telephone call was the result of his conversation with Dr. Labelle, and that he and Mr. Matthews sat "for about an hour" discussing the merits of Dr. Labelle's suggestion, Mr. Matthews testified that he did not recall any discussion with Mr. Hession about such a conversation between Mr. Hession and a Transport official; indeed, Mr. Matthews said that he deliberately did not tell Mr. Hession about the merger discussions, because "he was not in that loop." [Committee Transcript, Wednesday, September 13, 1995, Issue No. 18, 18:110-11.]

This is not to suggest that Mr. Hession was being anything less than forthright with the Committee. Indeed, other Government documents strongly support his rendition of events. A document entitled, "Terminal Redevelopment Project Lester B. Pearson International Airport: Meeting Notes," describes a meeting which took place on Thursday, March 18, 1993 in the boardroom of the Deputy Minister of Transport, and which was attended by twelve Department of Transport officials including Dr. Huguette Labelle, Deputy Minister of Transport, and Mr. David Broadbent, Chief Negotiator. One of the listed "points of note" states:

"Clear indication that the joint venture is a product of the Government (PCO/politicians)." [Meeting Notes, Committee Doc. 00007.]

Of course, we already know that the Prime Minister had asked the Clerk of the Privy Council to explore just such a possibility even before the RFP results were announced. [See Memorandum to the Prime Minister from Mr. Glen Shortliffe, Clerk of the Privy Council, dated November 16, 1992, Doc. 002188.]

How the merger came about is less important than why: the secrecy surrounding its origins simply highlights the fact that all the parties involved were aware that something out of the ordinary was going on.

Mr. Coughlin told the Committee that Claridge only purchased a controlling interest in Terminal 3 when the Government announced its intention to privatize Terminals 1 and 2. As he expressed it, "We did not want to operate just one piece of the pie. To us, operation of all three terminals was necessary in order to diversify our risk across the terminals; to produce significant operating and financial synergies; and to enhance our economic return." [ Committee Transcript, Tuesday, September 12, 1995, Issue No. 17, 17:12.]

The selection of Paxport's proposal by the Government gave Paxport a highly marketable right. Mr. Coughlin was very clear as to what Paxport brought to the bargaining table with Claridge: "[T]hey brought the right to negotiate 1 and 2." [Id., 17:28.] He also testified that Claridge valued the right to negotiate the Terminal 1 and 2 contract at between $20 million and $35 million. [Id, 17:30.]

Thus the mere awarding of the right to negotiate gave Paxport an asset for which it had paid nothing except the cost of lobbying and of responding to the Request for Proposals. And the results of the merger were crystal-clear: Paxport remained "in the game," and the Prime Minister's hopes were realized -- everyone got "a piece of the action."

Apparently Mr. Hession's role at Paxport changed once Paxport's proposal won the RFP process. On December 7, 1992, the company, in Mr. Hession's words, "constructively terminated" his employment. [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:15.] However, four days earlier Mr. Hession and Paxport had concluded a "post- employment package," under which Mr. Hession was to receive $83,750 each year for the rest of his life (and if he predeceased his wife, she would then receive $41,875 every year for the rest of her life), and a special bonus of $120,000 on signing the Pearson redevelopment agreement with the Government. [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:15.]

This pension -- which is unquestionably generous, especially considering Mr. Hession only worked for Paxport for four years -- is currently the subject of litigation between Mr. Hession and Paxport, and so the Committee was unable to learn more about it when Mr. Hession testified. However, it is clear from the Statements of Defence filed with the court that Pearson Development Corporation and T1T2 Limited Partnership believed that the money to pay this "pension" to Mr. Hession was to come from the Pearson Airport redevelopment agreement with the Government. They claimed:

"If these Defendants [Pearson Development Corporation and T1T2 Limited Partnership] were ever bound by the Contract, which is explicitly denied, the Contract became impossible to perform when the Federal Government refused to perform the Airport Contracts. These Defendants could not redevelop, operate or manage Terminals 1 and 2 Complex. The Plaintiff could not perform services contemplated by the Contract. The Contract therefore became impossible to perform without any fault on the part of these Defendants and the Contract was thereby frustrated. These Defendants were discharged from any obligations under the Contract." [Statement of Defence filed on behalf of Pearson Development Corporation and T1T2 Limited Partnership with the Ontario Court (General Division), Court File No. 80004/94, para. 13, emphasis added.]

What Mr. Hession viewed as a pension -- for which one does not usually provide services, since it is given in recognition of services provided in the past -- was evidently viewed by the consortium as a cost of redeveloping, operating and managing the Terminals 1 and 2 Complex. In other words, while Mr. Hession apparently had no intention of providing services at the Terminals, the consortium would have written off the pension payments as a business cost -- money skimmed off the top of revenues from Pearson, before even calculating the profits to accrue to the consortium. This was only the first of what became a stream of arrangements disclosed to the Committee, by which members of the consortium would have diverted revenues from the most profitable airport in the country to themselves, over and above the rate of return negotiated with the Government.

The Doucet Lobbying Contracts

Paxport then engaged another lobbyist, Dr. Fred Doucet. Dr. Doucet had impressive credentials: he is known to be an old and close friend of the Mr. Mulroney; he served as Mr. Mulroney's Chief of Staff when the latter was Leader of the Opposition; and then he served as the Senior Advisor when Mr. Mulroney became Prime Minister. [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:54.] Mr. Doucet registered as a lobbyist for Paxport Inc. on December 23, 1992. He testified that while his contracts with Paxport were not signed until February 1, 1993, they took effect in late December 1992. [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:69.]

There were two contracts: one with Paxport Inc., and the other with Paxport International. Together, they would have paid Dr. Doucet more than $2 million over a ten- year period.<28> As Senator Grafstein described the contracts when Dr. Doucet appeared before the Committee, "It's a ten-year fixed contract. No cut, no change, no variation, no ability of any party to change it." [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:94.]

Mr. John Nelligan, Counsel to the Committee, agreed: "[T]here appears to be no provision here for amendment or cancellation within the terms specified." [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:95.]

Dr. Doucet denied that he was engaged to lobby for Paxport in the contract negotiations on-going in 1993. He would only acknowledge that these $2 million contracts were "going to be triggered at the moment that the new management team...moved...to Pearson Airport Terminals 1 and 2." [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:66.]

He claimed that, "The Paxport Incorporated contract [worth $1,044,000] was intended primarily to advise on other Canadian airport opportunities as the airports devolution program progressed over the next decade." [Id., 16:58.] He elaborated: "[T]he list of Canadian airports that were targeted for devolution was 25; 25 airports in Canada. At that point, if my memory serves me right, there was only Vancouver that was officially LAA'd, as it were." [Id., 16:66.]

In April 1992, however, the Government had announced the signing of LAA agreements for each of the Vancouver, Montreal, Edmonton and Calgary International Airports. [Press Releases dated April 1992, Committee Doc. 00015.] In other words, by December 1992 there were no more major Canadian airports to be devolved -- they had all already been "LAA'd," to use Dr. Doucet's term. One is forced to wonder why, with the Conservatives at a record low in the polls, and with an election imminent, Paxport would sign a prominent Conservative lobbyist to a ten-year no-cut contract to lobby a future government -- most probably, a Liberal government -- for the devolution of airports that did not exist.

According to Dr. Doucet, the second contract, with Paxport International, worth $960,000, was for his anticipated assistance "in developing international markets to promote and position Paxport's airport development technology outside Canada." [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:58.]

The timing of this arrangement also is surprising. The contracts were signed at a particularly precarious point for the Matthews Group. They had successfully lobbied to have their proposal for the redevelopment project selected, only to discover they could not finance it alone and would have to relinquish at least half (it ended up being more) to their competitor. A disinterested observer might have thought this was the time the Matthews Group needed lobbying assistance more than ever. It is passing strange that they would agree to pay over $2 million to one of the best connected lobbyists in the country, and yet not ask him to assist on this crucial task, particularly when, as we have seen, the Doucet contracts themselves were contingent on the consummation of the Pearson deals.

The Committee was unable to learn about the nature of Dr. Doucet's lobbying activities on behalf of Paxport. While Dr. Doucet submitted invoices documenting that he billed Paxport Inc. $10,000 a month for lobbying services<29>, when asked whether he met or spoke with Cabinet Ministers, Chiefs of Staff, or Mr. Shortliffe, the Clerk of the Privy Council, Dr. Doucet replied: "I have no recollection." He admitted only to meeting with the chief of staff to the Minister of Transport. [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:83.] Yet Dr. Doucet was paid $120,000 a year.

Not Financeable: The March 2, 1993 Deloitte & Touche Report

In mid-January, 1993, the Government retained the services of Deloitte & Touche, a well-known accounting firm, "to provide advice on the financeability of the [Paxport proposal to assume responsibility for Terminals 1 and 2] project." [Deloitte & Touche Report dated March 2, 1993, Committee Doc. 00190, page 1.]

As of February 1993, the various members of the Paxport consortium had committed to contribute equity of over $57 million; however, only $4,426,775 had actually been advanced.<30> Of particular concern to Mr. Paul Stehelin, the partner at Deloitte & Touche responsible for the file, were $20 million to be contributed by Matthews Group Limited. The documents provided to the Committee included a memorandum dated February 11, 1993 from Mr. Stehelin to his Paxport file, reporting on a telephone conversation he had had that morning with Mr. Don Matthews. Mr. Stehelin asked Mr. Matthews to clarify a statement that "[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." Mr. Stehelin's memorandum vividly describes Mr. Matthews' response:

"Mr. Matthews' answer was that they had arranged the money and that's what the letter said, so there shouldn't be any problem. I indicated that we were being asked to give an opinion on the availability of these funds to Paxport at the turnover date via the Matthews Group. I stated 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, I said "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."

"After a very brief discussion, 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." [Memorandum from Mr. Paul Stehelin to "Paxport File," dated February 11, 1993, Committee Doc. 00188.]

In fact, as the Committee discovered, Mr. Matthews knew full well where the $20 million was coming from: on June 10, 1992 -- while it was preparing its response to the Request for Proposals -- Paxport and the Matthews Group had concluded an agreement with Allders International Canada Limited, pursuant to which Allders agreed both to put up $15 million directly to the consortium, and to lend Paxport Investments Ltd. $20 million. Of particular interest were the terms of that loan. If Paxport Investments Ltd. defaulted on the loan, Allders would have received its shares of Paxport -- giving Allders effective control of Terminals 1 and 2.

In a letter to Mr. Victor Barbeau, Mr. Stehelin reviewed the financial reports of the Matthews Group Limited, and observed:

"Based on the financial information provided at November 30, 1992, we are unable to determine whether Matthews Group would be in a position to fund the $20 million were it not for its Heads of Agreement with Allders International Canada." [Letter from Mr. Stehelin to Mr. Barbeau dated February 22, 1993, Committee Doc. 00196.]

This arrangement with Allders caused significant consternation to Mr. Stehelin at the time, and to us reviewing this deal, for several reasons. First, Allders operated duty free shops, and would have had a 25-year lease to operate the duty free shops at Terminals 1 and 2. Mr. Stehelin testified he was greatly concerned at the prospect of having a major tenant control the airport.

Second, the Request for Proposals had stipulated that only those developers who were Canadian and were controlled in fact by Canadians, qualified to submit proposals. Indeed, this was a limitation hard fought for by Mr. Hession on Paxport's behalf, in his concerted efforts to prevent British Airports Authority from submitting a bid. [See: Request for Proposals, March 1992, page 35.]

Allders International Canada Limited was owned 51% by Agra Industries, a Canadian company, and 49% by Allders PLC, a British company. However, as Mr. Stehelin testified, no one knew whether in fact Allders International Canada Limited was controlled by Canadians, or whether the British company actually controlled it.<31> [Committee Transcript, Thursday, August 17, 1995, Issue No. 13, 13:24-25.]

It is interesting to speculate what reaction the Evaluation Committee considering Paxport's proposal would have had, had it known of the Paxport-Allders agreement. As the above documents demonstrate, the Matthews Group was far from keen to disclose the terms of the agreement.

On March 2, 1993, Deloitte & Touche issued its report. Its conclusions were unambiguous: they could not assure the Government that Paxport's project could be financed.

They noted that:

"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." [Report of Deloitte & Touche dated March 2, 1993, Committee Doc. 00190, page 3.]

The report concluded:

"On the basis of our work to date, it appears that the original intent of the Request for Proposals has been altered somewhat by PAXPORT to accommodate its need to finance this redevelopment on a "finance-as-you-go" basis. The composition of the consortium has changed significantly since the receipt of the Proposal and the Department has yet to receive full and complete details of these changes; however, it appears that most of the equity for the first stage of the project would be available. While there is a high probability that the debt financing for the first stage could be placed, it is very conditional on the resolution of significant outstanding issues by PAXPORT. There are also questions regarding a number of assumptions about the role of the Crown which should be resolved.

"Until these issues, particularly those where the onus is on PAXPORT are resolved, we cannot provide assurance to the Crown that this project can be financed." [Report of Deloitte & Touche dated March 2, 1993, Committee Doc. 00190, page 6, emphasis added.]

This report caused an uproar. The next day, March 3, 1993, Paxport representatives (Mr. Ray Hession, Mr. Jack Matthews, and Mr. Peter Kozicz) met with Dr. Huguette Labelle, Deputy Minister of Transport, Mr. Keith Jolliffe, Mr. Green and Mr. Richard LeLay, Chief of Staff to the Hon. Jean Corbeil, Minister of Transport. The Transport Canada memorandum of the meeting reported statements by Mr. Hession that "TC was using the wrong people, i.e. Deloitte Touche." It continued:

• Hession presented the DM with a letter to sign (DM to PAXPORT) stating that TC officials were being directed to begin discussions on March 4.
• The DM did not accept the letter and said she never thought she would see the day when Hession was her executive assistant!!. Also TC was not "going to rol[l] over," PAXPORT should talk to Deloitte Touche on Friday after which TC would seek direction on the project from the politicians." [Memorandum entitled "Telcon Between Driedger/Heed/Desmarais and Barbeau/Jolliffe," March 4, 1993, Committee Doc. 00189.]

The memorandum notes several "Other Comments on the Situation," including:

• ADM's view is that Shortliffe is trying to orchestrate something but not sure what
• Lobbyists are abuzz
• Many not-so-well-veiled threats during the meeting." [Memorandum entitled "Telcon Between Driedger/Heed/Desmarais and Barbeau/Jolliffe," March 4, 1993, Committee Doc. 00189.]

Mr. Shortliffe refused to comment to the Committee on this suggestion as to his activities. [Testimony of Mr. Glen Shortliffe, Committee Transcript , Monday, September 25, 1995, Issue No. 24, 24:81-82.]

Whether thanks to the lobbyists' activities, Mr. Shortliffe's "orchestration," or other connections, this meeting and particularly Mr. Matthews' concerns, were reported to the Prime Minister with lightning speed. On March 5, 1993 Mr. Shortliffe wrote a Memorandum for the Prime Minister, in which he detailed the concerns raised by Deloitte & Touche, underscoring their conclusion that "'unless these issues are resolved, we cannot provide assurance to the Crown that the project can be financed'." [Memorandum for the Prime Minister from Mr. Glen Shortliffe, March 5, 1993, Committee Doc. 002191, emphasis in original document.]

Mr. Shortliffe detailed Mr. Matthews' position as presented in the March 3 meeting, including, "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 has undermined Paxport's credibility and negotiating position with Air Canada." [Memorandum for the Prime Minister from Mr. Glen Shortliffe, March 5, 1993, Committee Doc. 002191.]

Mr. Shortliffe's information for the Prime Minister was up to date: he reported in the memorandum on a meeting Paxport had held that day, March 5, with Deloitte & Touche. He then noted, "An impasse could develop on the financeability question.... We have asked Transport to develop options in case an impasse develops."

In a separate, handwritten note at the bottom, Mr. Shortliffe added:

"Prime Minister: I've been having some conversations on this file on which I will report to you orally. GS."

When he testified, Mr. Shortliffe stated, "As I recall, I believe that handwritten note related to various discussions that were going on at the time with respect to the prospects for Mergeco." [Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:68.]

And indeed, Paxport's financeability problems were resolved by the merger with Claridge, whose "deep pockets" were accepted by Deloitte & Touche in their later, August 17, 1993 report, as more than adequate assurance of financeability. [Report of Deloitte & Touche dated August 17, 1993, Committee Doc. 00098.]

The Mergeco solution would have resulted in all three terminals at Canada's busiest airport being controlled by one private entity. All Mr. Hession's arguments against such a monopoly -- presented when Paxport was seeking to ensure that it won the redevelopment project over Claridge -- suddenly had lost their cogency, and were replaced by discussions of the "synergies" of having all three terminals operated by a single entity. Once again, consideration for the increased cost to the travelling public was conspicuously absent.

Concerns at the Treasury Board Secretariat

The Treasury Board Secretariat was also involved at this point. Its numerous memoranda show its strong concern with the way the project was progressing. On March 12, 1993, Mr. Mel Cappe, then Deputy Secretary, Program Branch in the Treasury Board, wrote a memorandum to Mr. Ian Clark, then Secretary of the Treasury Board. (Mr. Cappe explained to the Committee that Mr. Clark's position was equivalent to that of a Deputy Minister.) The memorandum outlined the history of the proposal process, and then described how Paxport and Claridge had "entered into this 'marriage of convenience' to protect their various interests." [Memorandum from Mr. Mel Cappe to Mr. I.D. Clark dated March 12, 1993, Committee Doc. 00304.]

Mr. Cappe reviewed the Deloitte & Touche report, saying:

"The report of Deloitte & Touche ... is very clear. Paxport is non-compliant with the RFP. Subsequent meetings between Transport, Paxport and Deloitte & Touche have not resolved any of the issues raised in the report.

...

"Paxport officials (Messrs. Hession and Matthews) met with Mme. Labelle last week and expressed outrage at what they see as bureaucratic stalling.

"Paxport officials questioned the credibility of everyone, including Deloitte & Touche. They also raised their concerns that until they are declared "the developer" by Transport Canada, Air Canada would not take them seriously.

"Since last week, Paxport has increased their pressure via PMO and Ministers." [Memorandum from Mr. Mel Cappe to Mr. I.D. Clark dated March 12, 1993, Committee Doc. 00304.]

When he appeared before the Committee, Mr. Cappe elaborated on his statement that Paxport was "non-compliant with the RFP." He explained: "[Paxport] was non-compliant with the RFP in that the government was not able to grant the -- to do the deal, if you will, on the basis of the proposal it had before it because Deloitte & Touche had found that it was not financeable, or that the financeability was called into question." [Committee Transcript, Tuesday, August 22, 1995, Issue No. 14, 14:22.]

Mr. Cappe was also clear that while he had no personal knowledge of pressure having been exerted on people within the Prime Minister's Office and other Ministers, this statement "was what we understood was going to be happening," based on discussions with colleagues "in other departments, in the central agencies, and discussing the way the file was developing. And in the course of those discussions, we would have exchanged on what we understood to be happening." [Committee Transcript, Tuesday, August 22, 1995, Issue No. 14, 14:28.]

The memorandum proceeded to describe the "current status" of the matter:

"The Deloitte & Touche report is probably already public knowledge. Proceeding to negotiate on a sole source basis with Paxport now would be very difficult to justify." [Memorandum from Mr. Mel Cappe to Mr. I.D. Clark dated March 12, 1993, Committee Doc. 00304, emphasis in original document.]

This paragraph is perplexing: after the RFP process, why would negotiating on a sole source basis remain an issue? Mr. Cappe was enlightening in his testimony:

"[I]t was our view that [Paxport] were non-compliant as proposed. What we were doing... was the government was consulting with Paxport, insofar as Paxport was the best overall proposal, to see if they could get up over that hurdle, if you will, to become compliant and then if they were compliant, we would then get into the negotiations.

"What we were indicating here was that if there was an interest in negotiating on a sole source basis with Paxport that that would be subject to severe criticism because the other bidder was still live, as it were, by being on the table. The Airport Terminal Group [Claridge] had not withdrawn its bid at that point." [Committee Transcript, Tuesday, August 22, 1995, Issue No. 14, 14:30.]

In other words, Deloitte & Touche (Paxport, really -- Deloitte & Touche was merely the unfortunate messenger) had in effect placed the Government in a difficult position: by demonstrating that Paxport could not comply with the RFP, the Government could not proceed to negotiate with Paxport while remaining true to the RFP process. The Government's position was exacerbated by Claridge, whose quiet presence, by means of its proposal (which remained "on the table" awaiting the recognition of the fact that Paxport's could not demonstrate financeability), served as a subtle check to ensure that the RFP process was upheld.

This was precisely the situation anticipated by Claridge. In a discussion in mid- December, 1992 with the Deputy Minister of Transport, Claridge was reported to have been "positive Paxport cannot finance and therefore will be observing closely and taking appropriate legal action if proposal changes." [Fax cover sheet from Mr. Michael Farquhar to Mr. Chern Heed, dated December 17, 1992, Committee Doc. 001540.]<32>

In effect, the Government had four choices: (1) proceed to negotiate with Paxport, and bear the risk of a lawsuit; (2) declare that Paxport had failed to meet the financeability condition, and proceed to negotiate with Claridge as the next-best proponent; (3) bring Claridge "on side" with Paxport; or (4) wait for an LAA to be established, and proceed as with the other major Canadian airports.

This situation was succinctly expressed by the Treasury Board memorandum:

"This file is extremely messy, and in our view, it is unlikely any contract for construction could be struck within the next six months. Overall our preference would be to wait for the LAA at Pearson to be established, and for Transport to quickly transfer the responsibility for the terminal redevelopment and new runway projects (another possible problem file) to the LAA for execution. This is what is happening in Vancouver, where the LAA is currently proceeding with terminal expansion and a new runway." [Memorandum from Mr. Mel Cappe to Mr. I.D. Clark dated March 12, 1993, Committee Doc. 00304]

Trying to Merge Paxport's Proposal and Claridge's Pockets

Why did the Government go to such pains to keep Paxport in the game? The only answer offered throughout these hearings was that the Government preferred the Paxport proposal. However, as will be seen below, the final deal was far from the Paxport proposal. Indeed, this was recognized by the Government negotiators even before the "consultation" phase ended and "negotiations" began. (Until Paxport had established financeability to the satisfaction of the Government, the parties could only "consult;" they could not begin negotiations. See, e.g., testimony of Mr. Mel Cappe, Committee Transcript , Tuesday, August 22, Issue No. 14, 14:41, 44-45.)

The Government's Chief Negotiator, Mr. David Broadbent, sent Mr. Shortliffe what he described as a "warning note" on March 18, 1993, before Mr. Broadbent was to have dinner with Mr. Matthews:

"A minefield could open up at Bronfman Matthews meeting because:

"1. It seems there is no way you can take Paxport substance and merge it with Claridge financing. Changes would be needed either cutting back on scope of development or raising more funds than Claridge bid envisaged. Causing modifications to merge proposals obviously impacts on integrity of RFP system which may or may not give cause for concern." [Memorandum for Mr. Glen Shortliffe from Mr. David Broadbent, dated March 18, 1993, Committee Doc. 2179.]

This was followed up with a memorandum, again to Mr. Shortliffe, after the dinner meeting. Mr. Broadbent reported:

"Abundantly clear that an $800m development cannot be financed by $500m Claridge deal. So either one cuts back on development or ups cash from Claridge levels (or some combination) if one wants to reduce up-front hit on airlines.

"Regarding Mergeco situation, Jack was strongly positive on current "in-bed" nature. Fears of Claridge waiting in weeds were imaginary. He said he could easily secure change to Mergeco deal so that if Goverment wanted to go with Claridge offer now, two parties would be cut in 50/50. [Memorandum to Mr. Glen Shortliffe from Mr. David Broadbent, Committee Doc. 000912, emphasis in original document.]

Thus, it was "abundantly clear" to everyone that the original plan would not work; one could not take Paxport's proposal and simply add Claridge's "deep pockets," and proceed happily. Indeed, it is evident that Mr. Matthews was happy now to offer to go along "if the Government wanted to go with Claridge offer now," since now he was assured of being "cut in 50/50."

The suggestion is strong: the only reason Paxport's proposal was proceeded with was because it gave Paxport the leverage to ensure it would be "cut in 50/50" on the deal. In fact, the final deal was very much closer to Claridge's proposal than to that of Paxport. The Government might just as well have proceeded with Claridge, except that in that case Paxport would have been cut out.

More Voices of Opposition

The developers also succeeded in silencing opposition voiced from within Transport Canada. The Assistant Deputy Minister, Airports, Mr. Victor Barbeau, was not named as Chief Negotiator for the deal by Huguette Labelle, the Deputy Minister of Transport, at least in part because the Hon. Jean Corbeil, Minister of Transport, told her that he "had had representations by different people indicating that they perceived Mr. Barbeau as slowing down the process." [ Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:9.] Dr. Labelle said the Minister indicated to her in discussions that "perceptions were out there" such that "it would probably not be in the best if we asked Mr. Barbeau." [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:41.]

Ultimately, the representations against Mr. Barbeau became so intense that he was sent home on "gardening leave," from May 27 until early July, 1993. When he returned, while he continued as Assistant Deputy Minister, Airports, he "was not ... involved in any way with the [Terminal 1 and 2 redevelopment] file as it progressed." [Testimony of Mr. Barbeau, Committee Transcript, Tuesday, July 11, 1995, Issue No. 2, 2:26.]

Dr. Labelle was very clear as to the source of the representations against Mr. Barbeau: they came from "the people who were negotiating with us on the other side of the table." [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:9.] These people were not shy about letting their views about Mr. Barbeau be known. Dr. Labelle testified that Mr. Glen Shortliffe "had indicated to me that ... he had had representations to the extent that Mr. Barbeau was impeding the process as well." [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:38.]

Dr. Labelle was emphatic in expressing her view "that Victor Barbeau is a highly professional public servant who was working extremely hard at that time.... I did not share that view [expressed by the Minister of Transport]." [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:9.] Full confidence in Mr. Barbeau's professionalism and diligence was also expressed by Dr. Labelle's successor as Deputy Minister of Transport, Mme. Jocelyne Bourgon. [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:65-66.]

None of the witnesses before the Committee in any way questioned Mr. Barbeau's motives in disagreeing with the pace and evolution of the negotiations over Terminals 1 and 2. But it was clear that because he was expressing concerns, he was viewed by the developers as an obstacle to a rapid and satisfactory resolution of the situation. Of greatest concern is the fact that these views were heeded, and that one of the most senior officials, with extensive knowledge of the needs at Pearson Airport, was removed from the file (and for a time, from the Department) to allow the negotatiations to speed to a conclusion.

Meanwhile, Treasury Board officials doggedly persisted in raising their concerns, notwithstanding that apparently they were falling upon deaf ears. On April 1, 1993, Mr. Gershberg sent a memorandum to Mr. Cappe, briefing him on what Mr. Gershberg described (again) as "an extremely messy file." The briefing was in preparation for a meeting "called by Mr. Shortliffe to review issues on the T1 and T2 file." [Memorandum from Mr. Sid Gershberg to Mr. Mel Cappe, dated April 1, 1993, Committee Doc. 00298.] Mr. Gershberg concluded his lengthy memorandum:

"The Minister of Transport has put the Department in a box in pursuing his 'preferred bidder' approach. Justice should be the one providing guidance to keep the Department out of a legal suit." [Memorandum from Mr. Sid Gershberg to Mr. Mel Cappe, dated April 1, 1993, Committee Doc. 00298, emphasis added.]

Treasury Board memoranda from this period note what they term the Government's "primordial" preoccupation with the selection process, pointing out that from Treasury Board's perspective, "the protection of the integrity of the bidding process" was crucial. It is also plain from the memo that the Treasury Board officials were concerned that this preoccupation was not allowing them to address the real issues that had to be considered in the deal. The memo notes that this overwhelming concern with the bidding process had supplanted their usual priorities, personnel issues in particular. [Interoffice Memorandum from Mr. Mel Cappe to seven Treasury Board officials, dated April 5, 1993, Committee Doc. 001103.]

Privy Council Office Involvement

The shadow of the Privy Council Office ("PCO") lies across many of the Government documents on the Pearson project in this time period. There were numerous memoranda of meetings called by Mr. Glen Shortliffe "to check on the status of the negotiations/ discussions on the redevelopment project for T1/T2." Mr. Broadbent testified that he and Dr. Labelle, Deputy Minister of Transport, went "almost weekly, to meetings in Glen Shortliffe's boardroom." [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:89.]

Treasury Board officials complained several times that Mr. Broadbent was dealing directly with Privy Council officials, rather than going through the usual channels. As a result, they noted repeatedly that it was "very difficult for [Treasury Board] to stay on top of this file." [See: Memorandum from Ms. Carole Swan to Mr. Sid Gershberg, dated April 29, 1993, Committee Doc. 00269; see also, Memorandum from Ms. Carole Swan to Mr. Sid Gershberg, dated May 10, 1993, Committee Doc. 00272.]

Ultimately, when Mr. Broadbent's term as Chief Negotiator ended, he was replaced with an official brought in from the Privy Council Office, Mr. Bill Rowat.<33>

Mr. Shortliffe did not believe that he spent a "disproportionate" amount of time on the Pearson file. He justified the many meetings and close supervision with the statement that the deal "was one of the priorities that the government of Prime Minister Mulroney had identified that it wanted to have completed before it left office." [Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:78.] And in particular, part of the close involvement of PCO was attributed to the intense pressure being brought to bear to conclude the deal by May 31/June 1, 1993. (This does not fully explain, however, why PCO dispatched Mr. Rowat to conclude the deal, since his term as Chief Negotiator did not begin until after the June 1 target date had passed with no agreement reached.)

Mr. Shortliffe testified that the May 31/June 1 deadline was driven by the desire of Prime Minister Mulroney to have the deal completed before he relinquished his office to his successor. [Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:74.] Mr. Broadbent told the Committee that he was fully aware of the Prime Minister's active concern with the progress of the file. Mr. Broadbent testified: "Mr. Shortliffe said that the Prime Minister had a live interest in this file and quite frequently asked how it was going." [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:103.]

An internal Paxport memorandum dated April 15, 1993, a copy of which was sent by Mr. Jack Matthews to Mr. Broadbent, reported "some interesting comments" made by Mr. Wayne Power, a Transport Canada official, in a meeting with a Paxport official:

"Wayne did make some interesting comments. He complained about the pace of the negotiations and about the political interference in the process. He bemoaned that the government, having made a decision about the future of the terminals, didn't sit back and allow the public servants to get on with the process in an orderly fashion 'just like Terminal 3'." [Memorandum entitled "Coordination with Transport Canada at LBPIA," from Mr. Dale Nankivell to Mr. Jack Matthews, dated April 15, 1993, Committee Doc. 001104, emphasis added.]

The Treasury Board officials who appeared before the Committee attested to the political pressure that was applied to complete the deal by May 31, 1993. In response to questions posed by Senator David Tkachuk, Mr. Cappe testified that there was "strong pressure," and that it "was a reflection of the number of meetings that were being called. Mr. Broadbent coming back from his negotiations indicating that he wanted to see progress quickly because he needed to deliver May 31.... [T]here was a common understanding among senior public servants that there was an urgency to the file to get the deal done by May 31st." [Committee Transcript, Tuesday, August 22, 1995, Issue No. 14, 14:94.]

The Committee learned that this pressure was coming directly from the Prime Minister.

On April 29, 1993, Ms. Carole Swan, then Director of the Transport and Environment Division of Treasury Board, noted that, "Mr. Shortliffe may indicate the need to meet regularly to keep things on track for June 1." [See, eg., Memorandum from Ms. Carole Swan to Mr. Sid Gershberg, dated April 29, 1993, Committee Doc. 00269.]

By May 6, 1993, the pressure had increased. "Shortliffe wants to meet weekly... to keep every one on track on both T1 and 2 as well as the runways." [Interoffice Memorandum from Mr. Paul Gonu to Mr. Al Clayton, dated May 6, 1993, Committee Doc. 000417.]

Mr. Broadbent agreed with Senator Michael Kirby that this level of involvement by the Privy Council Office, and by the Clerk of the Privy Council, was unprecedented:

Senator Kirby: [Y]ou just said that there were weekly meetings. I guess maybe having been around the job of secretary of the cabinet on and off for many years, I'm quite stunned that this issue was of such importance that the secretary of cabinet would take the time to spend weekly meetings at it. That gives it a level of importance that is truly unbelievable.... [I]t's just incredible.

Mr. Broadbent: ...[Y]es, I would agree with you. It did show the significant interest at senior levels of bureaucracy in the central agencies, and in part, senator, that, I put it to you, might well be because they knew that we were being asked to do an extreme amount of work in a very short time and didn't want things to go off the rails.

Senator Kirby: But would you not also agree on the basis of your other experience in the PCO that various parts of the public service often get asked to do things under very short time frames, but that central agency involvement -- because after all, this was a line department transaction.

Mr. Broadbent: Yes.

Senator Kirby: This was not a major policy issue in a policy sense. It was a transaction type issue. I have certainly never seen a case where the central agencies would have taken -- at least the PCO and the secretary of cabinet specifically -- this level of interest in it.

Mr. Broadbent: I can't think of a comparable situation either. [ Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:109.]

The documents highlight the difficulties officials faced by reason of the May 31/June 1 deadline. Back in November, 1992, Mr. Shortliffe had pointed out to the Prime Minister that "Transport's current estimate is ... it will take a minimum of 12 months to negotiate the lease." [Memorandum to the Prime Minister from Mr. Glen Shortliffe, dated November 16, 1992, Committee Doc. 002188.] As of late April, 1993, negotiations had not even begun; according to other memoranda to the Prime Minister from Mr. Shortliffe, "delays by Paxport and Claridge in clarifying the status of Mergeco ... were slowing progress on the file." [Memorandum for the Prime Minister from Mr. Glen Shortliffe, dated April 23, 1993, Committee Doc. 002210; see also, Memorandum for the Prime Minister from Mr. Glen Shortliffe, dated April 8, 1993, Committee Doc. 002097.]

Nevertheless, the documents show how great the pressure was to meet the June 1, 1993 deadline. Officials pointed out the risks in rushing such complex negotiations, noting that, "This timetable is extremely tight... we understand from Allan MacGillivray [an official in the Privy Council Office] that every effort will be made by David Broadbent to ensure that nothing compromises the attainment of this objective. As a result, very little time is left to address the human resources issues through an agreement with the operator." [Scenario Note, Interdepartmental Meeting on T1/T2 Human Resources Issues, dated April 27, 1993, Committee Doc. 002101, emphasis added.]

And from other officials:

"The deadline of June 1 still appears extremely optimistic. Negotiations are to be completed with sensitive personnel and financial issues still to be worked out. Locking in a complex deal under a long term lease agreement in such a short period may not be very prudent." [Memorandum from Ms. Carole Swan to Mr. Sid Gershberg, dated April 29, 1993, Committee Doc. 00269.]

Only on May 5, 1993 did negotiations officially begin,<34> and yet the "strong pressure" to meet the patently unrealistic May 31 deadline continued:

"Mr. Shortliffe has called this meeting to check on the status of the negotiations on the redevelopment project for T1 and T2. There remains strong pressure to meet the deadline of May 31, 1993, to arrive at an agreement. The Minister of Transport announced on Wednesday, May 5, 1993 that 'Formal negotiations based on the proposal submitted by Paxport are currently under way'." [Memorandum from Ms. Carole Swan to Mr. Sid Gershberg, dated May 10, 1993, Committee Doc. 00272.]

While a Prime Minister's desire to accomplish particular goals before leaving office is unremarkable, exerting pressure to conclude a deal of this magnitude in a matter of only three weeks demands scrutiny. The agreements would have transferred control of Canada's largest airport -- its "gateway" to domestic and international markets -- for 57 years. The Committee was told this was a vastly more complicated transaction than that for Terminal 3, since this involved a transfer of existing buildings, existing leases with retail tenants, existing leases with airlines, and existing arrangements with employees. [Testimony of Mr. Wayne Power, Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:11-12.] Yet, while the simpler Terminal 3 contracts took ten months to complete, the Terminals 1 and 2 leases were to be negotiated and concluded in three weeks. Why? The only answer the Committee received was that the Prime Minister wanted it done before he left office.

The Changing of the Guard

Ultimately the May 31/June 1 deadline was not met. As it became evident that the Government would change (from one headed by the Rt. Hon Brian Mulroney to one headed by the Rt. Hon Kim Campbell), several interesting events occurred.

First, a curious agreement was prepared quickly and executed on June 18, 1993, between the Government of Canada and Pearson Development Corporation. The agreement contains no final terms relating to the development project because, as was evident from the documents and the testimony of the successive negotiating teams, the many serious issues dividing the parties were still open and unresolved. Indeed, the agreement states that it "does not constitute a legally binding agreement between the parties." [Letter-Agreement between Her Majesty the Queen in Right of Canada and Pearson Development Corporation, dated June 18, 1993, Committee Doc. 000832.] The entire purpose was to bind the parties -- in particular, the new Government -- to continue the negotiations.

Mr. Rowat explained to the Committee that since "there was going to be clearly a change in the leadership and a new leader appointed and a new cabinet appointed.... there was a great deal of ... uncertainty...." The purpose of the document was to "record where we were in terms of the negotiations at a point in time and what the intentions were of the groups on both sides as to what the next steps would be from thereon in." [Committee Transcript, Thursday, August 3, 1995, Issue No. 10, 10:64-65.]

However, notwithstanding that this agreement failed to move the negotiations forward substantively, it succeeded in solidifying the understanding of all parties that a deal would go through. As such, it constituted one of the "milestones" referred to in these hearings by the negotiators -- a milestone that marked the Government's deepening commitment to a deal with these developers, and conversely, the possibly deepening exposure by the Government to restitution payments should it decide that the terms were unacceptable, or for whatever reason, that it did not wish to proceed. [Testimony of Mr. William Rowat, Committee Transcript, Monday, October 23, 1995, 1110-3.]

Around this time, another change was made that affected the file: Dr. Huguette Labelle, who had been Deputy Minister of Transport, was replaced by Mme. Jocelyne Bourgon. Dr. Labelle was clear with the Committee that she did not ask for a transfer from the Transport portfolio. While she would not say so, it is known that the transfer from Deputy Minister of Transport to President of the Canadian International Development Agency is a demotion in civil service terms, from the highest Deputy Minister ranking to a lower one. [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:33.]

The circumstances of this shuffle of deputy ministers is interesting. Mr. Bill Neville, who it will be recalled was part of Paxport's lobbying team, also acquired other responsibilities in June 1993: he became the head of the transition team as the Rt. Hon. Kim Campbell became the Prime Minister. As Mr. Neville explained his duties:

Mr. Neville: In general terms, the agenda involved the actual transition arrangements between the changing of the guard, if you will, the restructuring and reorganization of the cabinet and the government that accompanied this particular transition. The appointment of ministers, the staffing of our office and a kind of immediate agenda of activity for Ms. Campbell. Those were the major items.

. . .

Senator Stewart: Did you discuss the disposition of deputy ministers, any deputy ministers who had proven unsatisfactory and who should be supplanted?

Mr. Neville: As part of the transition process flowing essentially out of the reorganization of the ministries that was involved there, there was also a reorganization of deputy ministers and that happened during this period.

Senator Stewart: Could you give us any specifics, let's say with regard to Transport?

Mr. Neville: It was during this reorganization that Mrs. Labelle was moved to CIDA as I recall. Jocelyne Bourgon was appointed the Deputy Minister of Transport. [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:21.]

Throughout the time that Mr. Neville was advising Ms. Campbell on ministers, staffing and the deputy minister shuffle, he continued to invoice Paxport for lobbying activities on Paxport's behalf. [See: Invoices signed by William H. Neville, made out to Paxport Management Inc., dated May 3, 1993 ("for services for the month of May, 1993"); June 3, 1993 ("for services for the month of June, 1993"); July 2, 1993 ("for services for the month of July, 1993"); and August 3, 1993 ("for services for the month of August, 1993"), Committee Doc. 002290.]<35>

Clearly there was a "revolving door" of personnel on this file, with deputy ministers, assistant deputy ministers and chief negotiators being moved in and out of the file at a rapid pace. Noting this, Senator John Bryden asked the Hon. Jean Corbeil the logical question: "Did you keep changing personnel until you got somebody that would make this deal happen?" [Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:73-74.] Mr. Corbeil refused to answer the question, choosing instead to attack the question as "insidious."

When Mme. Bourgon became Deputy Minister she, together with the Minister of Transport, decided that she should focus on the overall needs of the Department, rather than trying to get up to speed on the complex negotiations. [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:53.] As a consequence, Mr. Rowat retained control of the file.

The only constant, then, throughout the evolution of this deal from inception until signing in October 1993, was Mr. Glen Shortliffe, who first was involved as Deputy Minister of Transport and then continued active, close supervision from his positions at the Privy Council Office. Ultimately, of course, it was his assistant, Mr. Rowat, who stepped in to resolve the outstanding issues in the negotiations, and to get the deal done.

V. Negotiating the Agreements

On May 5, 1993, negotiations officially began between the government and Mergeco (by this point, renamed Pearson Development Corporation, hereinafter "PDC"). As was seen earlier, it was critically important to the Government that negotiations proceed, and be seen to proceed, on the basis of the Paxport proposal, and not either the Claridge or a "third" (or PDC) proposal. The Government recognized that otherwise the integrity of the RFP process would be seen to have been compromised.

Comparing the terms of the final deal with those of each of the original Paxport and Claridge proposals, it is plain that the final deal was much closer to the Claridge proposal than that of Paxport. This is evident from a comparison of the key numbers:

Return to the Crown: This was probably the most important element in the selection of the Paxport proposal as the "best overall acceptable proposal." The original return to the Crown promised by Paxport was $1,246 million. The return to the Crown promised by Claridge in its proposal was $642 million. The return to the Crown under the terms of the final deal was $843 million -- far closer to that set out in Claridge's proposal than what was promised in Paxport's proposal.

Construction Expenditures: Paxport promised to spend $858 million in staged redevelopment of the terminals; Claridge promised to spend $606.2 million in staged redevelopment of the terminals; and the final deal required $682 million in staged development. (As will be set out in detail below, only $350 million was actually required; the balance of the construction expenditures would be necessary only if certain passenger volume levels were met.) $682 million is much closer to $606.2 million than it is to $858 million.

Development Plan Financing: Paxport's original proposal required $858 million, to be financed through a combination of $106.5 million equity, $618 million in debt, and $33.5 million from cash flow from operations. The Claridge proposal required $758.2 million, to be financed with $227.5 million in equity and $530.7 million in debt. The final deal required $742 million, to be financed through $258 million in equity and $484 million in debt. The similarities between the final deal and the Claridge proposal are striking.

Airline Costs, Per Passenger: Paxport's proposal would have seen airline costs for each passenger rise to $4.93 in the first year, with this cost jumping to $11.79 in Year 10. Claridge's proposal would have restricted airline costs for each passenger to $2.49 in Year 1, going up to $8.79 in Year 10. Under the final deal, airline costs per passenger would have been $2.38 in Year 1, rising to $8.15 in Year 10.

Public Servants' Concerns

The contrast between the original Paxport proposal and what was being proposed for negotiation concerned public servants virtually as soon as negotiations began. In a memorandum dated May 10, 1993 to Mr. Sid Gershberg, Ms. Carole Swan of the Treasury Board noted:

"The most significant issue may be the degree of difference between what is being proposed now for the redevelopment of T1 and T2 and the original Paxport proposal (over $600 million)." [Memorandum dated May 10, 1993 from Ms. Carole Swan to Mr. Sid Gershberg, Committee Doc. 00272.]

The memorandum went on to discuss the proposed investment to redevelop the two terminals: an immediate investment of either $47 million or $96 million. It continued:

"Further development beyond the $47M or $96M investment in line with the original $600 million Paxport proposal would depend on passenger volumes reaching levels that make the project viable and:

• the airlines agreeing to leases that would allow recovery of their share of the costs; or
• the cash being raised by a Passenger Facility Charge (PFC)." [Ibid. ]

After noting the agreement negotiated with respect to a passenger facility charge -- "that no PFC would be considered before January 1996 and the Crown (or its assignee -- possibly an LAA) would have to approve the proposal and its details" -- Ms. Swan warned:

"Therefore, there is a risk that if these conditions are not met, the terminals could be turned over under a 57 year lease (40 year term with a 17 year option) for no other investment commitment than $47M or $96M." [ Ibid., emphasis added.]

Indeed, those were the final terms of the lease signed by the parties. The Ontario Government conducted a review of the final agreements for its submission to Mr. Robert Nixon. It noted:

"The tenant gets 57 years regardless of whether all the development stages are taken out. This is unusual. Typically, if a Tenant does not develop, it can lose the lease. The only opportunity for a Landlord buy-out is after exercise of option for the last 20 years." [Appendix A to Provincial Submission to Robert Nixon, dated November 17, 1993, Committee Doc. 002318, page 212-720, emphasis added, underscoring in original document.]

Returning to May, 1993: There were more internal memoranda, expressing ever more urgent concern among the public servants about the deal being negotiated. On May 17, 1993, Mr. Robert Fonberg of the Department of Finance wrote to his Assistant Deputy Minister, Mr. Michael E. Francino, to update him on the negotiations and outstanding issues. This memorandum began:

"Transport officials have been working at a furious pace to meet the goal of signing final agreements by the end of May. Within weeks, the government will be bound by the terms of a 57 year lease." [Memorandum dated May 17, 1993 from Mr. Fonberg to Mr. Francino, Committee Doc. 002072, emphasis in original document.]

Mr. Fonberg expressed great concern over the potential that the developer, in control of all three terminals, would be in a position to charge monopolistic fees:

"As mentioned in previous notes, once final agreements are signed with PDC, the developer will oversee all three terminals at Pearson. We are concerned that PDC will soon be in a position to charge "monopolistic" fees. Transport officials are considering ways of controlling future prices but have not yet developed acceptable solutions. Safeguards need to be built into the ground lease so the airlines cannot be hit with charges beyond those contemplated in the original proposal.

"Regarding airline charges, we should note that the Paxport proposal forecasts a more than tripling of fees over the next 10 years, from $2.38 to $8.72 per passenger. The government may be open to some criticism for condoning, and perhaps encouraging, these higher rates: PDC will be setting prices to recover capital expenditures, O&M costs, ground rents and profits; in the early years of the project, ground rents of almost $30M account for a third of the airline charges; by the tenth year, these rents approach $100M. Clearly, if this deal stands, a communications plan should be developed which defends the higher prices and ground rents. Government cannot "pass the buck" to the developer." [Ibid, emphasis in original document.]

No significant safeguards were built into the lease, however; and the cost of the development, including both the high return to the Crown and the substantial profits to the developers, would have been passed right through to the travelling public.

Mr. Fonberg discussed the Finance Department's review of "the economics of this project to determine if the risk/return trade-off faced by investors is reasonable." Working with PDC's forecasts of an after-tax internal rate of return of 19%, Mr. Fonberg warned:

"'Risky' projects might require a rate this high to attract investors; however, our initial impression of the T1/T2 project is that the developer bears little risk:

• development only proceeds once traffic volumes surpass pre-defined trigger levels,
• airline acceptance of higher prices or the introduction of PFCs are also pre- conditions to further development work,
• leases between PDC and the airlines will likely be structured so the airlines continue to pay the same fees irrespective of traffic levels,
• the formula for setting airline charges enables PDC to flow through three quarters of any construction cost overruns to the users, and
• Transport may be considering a 'guarantee' on traffic whereby a commitment would be made to not divert traffic from Pearson if volumes could fall below 30 million passengers.

. . .

"In summary, our preliminary view is that a 19 per cent IRR for the T1/T2 project may be excessive, considering the minimal level of risk." [Ibid., emphasis in original document.]

On these points, the deal signed in October 1993 did not remove the risks against which Mr. Fonberg had warned. Indeed, Transport ended up agreeing to the guarantee not to divert traffic from Pearson, thereby bestowing a monopoly of access to the skies over southern Ontario upon the developers.

The Finance memorandum ends pessimistically:

"Unfortunately, given the government's desire to sign a deal within two weeks, it is unlikely that Transport would be successful in negotiating a lower rate from the developer. No doubt, PDC feels it has an upper hand in negotiations." [Ibid, emphasis in original document.]

Concessions Won by the Developers

Indeed, PDC managed to strengthen significantly its upper hand in the negotiations by means of the so-called "Air Canada Sandwich." As will be seen, PDC managed to persuade the Government that a serious wrong had been committed by its officials in the RFP process, which could give rise to legal claims.

A Treasury Board memorandum of May 19, 1993 also noted that "the Mergeco deal is already heavily in favour of the developer (i.e. low risk, high rates of return) and further concessions are unwarranted." [Memorandum dated May 19, 1993 from Mr. Sid Gershberg to Mr. Mel Cappe, Committee Doc. 001107.] The memorandum notes:

"[S]triking a deal on the guarantee of future lease payments to be made by airlines or a promise by the government to agree to a PFC may put the next government in a very difficult position.

"Overall, it is not clear to us whether Transport has developed a 'bottom line.'" [Ibid., emphasis in original document.]

If there was a bottom line, it certainly was not in place in late May 1993. In a memorandum dated May 25, 1993, Mr. Rowat explained to Mr. Shortliffe a proposal by Pearson Development Corporation to defer $11 million in annual rents. Mr. Rowat reported:

"Mergeco is proposing to spend $96 million in the first two years but only on the condition that Transport Canada reduce its rent by $11 million per year until new agreements with the airlines can be reached, maybe not until 1997. We have recommended against this rent reduction because:

• it could reinforce the preconception in the minds of the project's critics that the agreement was not reached on wholly commercial terms;
• the rates of return on the project are already adequate (18.2%);
• it would give the appearance of the government subsidizing the project, when the underlying principle is private sector development;
• there is no source of funds for the up to $44 million cost,
• it might appear to be a subsidy to the airline industry." [Memorandum to Mr. Shortliffe from Mr. Rowat, dated May 25, 1993, Committee Doc. 002194, bold added, underscoring in original document.]

Mr. Rowat testified that the issue of the rent deferral came to a head in late May. He was very clear: "At that point, the issue was resolved by the government, and it was the government's directions to officials that we should take the $11 million deferral for three years." [Committee Transcript, Wednesday, August 16, 1995, Issue No. 12, 12:7, emphasis added.]

When he testified, Mr. David Broadbent, who had first negotiated this rent deferral, agreed that it could be seen as "a subsidy or ... a loan from the Crown" to the developers in order to get the project started. [Committee Transcript, Thursday, August 3, 1995, Issue No. 10, 10:27.]

This direction contradicted the Request for Proposals, which provided:

"Notwithstanding that the Government is expecting an appropriate financial return in consideration of its contribution, the Government will provide no form of financial commitment including, for example... no provision of additional financial guarantees and no investment of any capital in the Project. The Government will not assume any role which may be interpreted as a partnership or joint venture.

"Furthermore, the Government will make no guarantees regarding any assumptions with respect to Airport capacity, passenger volumes, airline assignments, commercial rents and charges, or any other variable factor or condition which may impact upon the Developer's calculations of revenues and costs." [Terminal Redevelopment Project Request for Proposals, March 1992, page 29, Committee Briefing Book, Tab "H".]

Viewed in context, the Government's ready agreement to this $33-million deferral does "reinforce the preconception in the minds of the project's critics that the agreement was not reached on wholly commercial terms," as Mr. Shortliffe was warned that it might.

The Committee heard testimony about a number of provisions in the final deal that were directly counter to the Request for Proposals; risks normally borne by the developers (the rationale for their reaping large profits from the project) shifted onto the Government; insulated the developers from competitive market forces; and passed the costs of the development, of the profits to the developers and of the return to the Crown on to the shoulders of the travelling public. These included:

The passenger diversion guarantee: In the RFP, the Government was explicit that it would not provide any guarantees with respect to airport capacity, passenger volumes or airline assignments.

Nevertheless, Paxport was given such a guarantee by the Government. The Government promised not only not to divert traffic away from Pearson, but that it would not allow any passenger terminal facility to be developed within 75 kilometres of Pearson, until the volume of passenger traffic at Pearson Airport -- including all three terminals -- reached 33 million people annually.<36>

Transport officials were emphatic in their opposition to such a guarantee. Mr. Power pointed out:

"It is my view that the capacity figures being put forward by Paxport are grossly exaggerated and unachievable. Additional terminal facilities to serve the needs of the Toronto area will be needed before those capacity figures are achieved. A compensation package will be a serious contingent liability for the Crown and an impediment to the provision of services as and when needed.

"In summary, it is recommended that traffic guarantees, compensation, protection from competition or similar concepts be rejected. Paxport has expressed an interest in participating in a privatization initiative, expects to reap rewards which are equal to or greater than most private-sector initiatives, and should be prepared to do so under conditions which exist in the private sector." [Memorandum from Mr. Wayne Power to Mr. Chern Heed, dated May 11, 1993, Committee Doc. 002013, emphasis added.]

The same warning was sounded in another Transport Canada memorandum, this one from May 12, 1993:

"Diversion of traffic could result if one or several of the airlines occupying T1/T2/T3 decided to relocate to another facility or decided to split their operations shifting some traffic to a new facility. It could also occur if airlines not operating at T1/T2 or T3 set up in a new facility and attract passengers that were using T1/T2 or T3 airlines. This type of diversion, initiated by the airlines based on market forces (location, access, level of service, price) should be accepted by Mergeco as a risk of doing business. If their 'product' is competitive then they should be able to maintain their market share." ["Traffic Diversion - Minimum Passenger Volume to 'Guarantee'?", dated May 12, 1993, Committee Doc. 002008, emphasis added.]

Mr. Heed -- Airport General Manager at Pearson -- forwarded Mr. Power's May 11 memorandum to Mr. Victor Barbeau, with the comment: "I am afraid [Mr. Broadbent] is sympathetic to giving Paxport some sort of comfort to protect them up to 39 million passengers. I see this as a guarantee or in other words a possible contingent liability...." [Memorandum from Mr. Chern Heed to Mr. Victor Barbeau, dated May 12, 1993, Committee Doc. 002013.]

There was an exception to the passenger diversion guarantee. The Government could proceed with the development of another airport to compete with Pearson, so long as it paid compensation to PDC or allowed it access to Area 4, a section at Pearson that has been targeted for future development, but which was expressly excluded from the Request for Proposals. Once again: PDC managed to gain a shield from all risk, persuading the Government itself to bear the risk (the compensation would be paid from the Government's ground rents under the agreement), and also to violate the terms of the Request for Proposals.

It is also clear that providing such a guarantee made it impossible for the Government to promote the use of the Mount Hope airport facility at Hamilton as an alternative access point to Southern Ontario -- an initiative launched in the very same August, 1989 Strategy for the Future of Aviation in Southern Ontario that had initiated the redevelopment of Terminals 1 and 2. [Minister's Press Release No. 98/89, August 18, 1989.]

Hamilton is as close to Toronto as Newark is to New York City; yet in their eagerness to finalize the deal with PDC, the negotiators surrendered the Government's ability to develop the airport there as an alternative access point to southern Ontario, even though that was part of the original Government plan, and even though to provide such a guarantee ran directly counter to the terms set out in the Request for Proposals.

Passenger triggers for construction: As noted earlier, the proposal anticipated a staged course of construction at the terminals. However, this changed over the course of negotiations to an agreement whereby the only firm obligation of the developers was to complete the "quickstart" construction -- $96 million -- followed by $254 million for stage 1B. No other construction would ever take place at the airport -- for 57 years -- unless and until certain passenger levels had been reached:

Senator Kirby: Am I correct then in saying that unless the passenger levels were very carefully negotiated, it would in fact be possible for the developers to have had this 57-year lease and spent no money at all beyond their initial quick start option because the trigger points were not reached? Would that have been a possibility?

Mr. Broadbent: If either the negotiators for the Crown had been stupid and incompetent or passenger growth in Pearson had absolutely stagnated, yes.

Senator Kirby: Well I'm not interested in imputing levels of intelligence to various people. Am I correct in saying that if the passenger levels had relatively -- if we just didn't reach the trigger points, and am I correct in saying the developers would not have had to spend more money?

Mr. Broadbent: You're quite correct, and development wouldn't have taken place and the negotiation of the trigger point, senator, was of fundamental importance. [Committee Transcript, Thursday, August 3, 1995, Issue No. 10, 10:31.]

As is evident from the internal memoranda quoted at length above, these provisions gave rise to great concern among the officials, particularly in the Finance Department and the Treasury Board. This deal was trumpeted as a "$700-million terminal development initiative -- the largest ever undertaken at the airport," when it was announced on August 30, 1993. [Transport Canada News Release Communiqué No. 187/93, dated August 30, 1993, Committee Doc. 002269.] However, it was very possible that much of the $700 million would never be expended on the airport, which could just as possibly be left undeveloped for 57 years -- with the Government unable to develop other airports in the area, unless it paid PDC compensation. In other words, the Government assumed the risk of low passenger levels at the airport. PDC was assured of keeping the airport under its control for 57 years, with few hard obligations to invest in the needed construction, and of course no political responsibility to the community it was serving.

The dangers for both the Government and the travelling public were exacerbated by the provisions in the deal with respect to Terminal 1 renovations. The Government had agreed to pay one-third of the costs required to keep Terminal 1 open, if those costs exceeded $15 million. However, those renovations would not have begun until certain passenger trigger levels were achieved; consequently, there was a very real risk that the Government's financial exposure in the continued upkeep of Terminal 1 could run into millions of dollars.

Furthermore, as explained by Mr. Stephen Goudge, a respected lawyer who served as legal counsel to Mr. Nixon in his review of the Pearson Airport deal:

"T1 could have been forced to close at some stage because of age, given that the passenger triggers were not met. That would have required the passenger traffic below the triggers to be split between T3 and whatever portion of T2 had been redeveloped. This might have forced the Crown to develop other facilities before a 33 million passenger threshold was achieved, thus reducing the Crown's rent for the amount of passengers transferred as well as the capital cost of the new facility." [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:47.]

In fact, stage 2, which was targeted to begin in May 1997, had a passenger trigger level of 24.2 million. At that time, officials were projecting that the terminals would be accommodating "roughly 26 or 27 million passengers a year" by 1997-98. [Testimony of Mr. John Desmarais, Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:68.]

However, the recession lasted longer at Pearson Airport than expected, and the levels remained flat. Today, at the end of 1995, passenger levels at Pearson Airport are only around 20.5 million. [Testimony of Mr. John Desmarais, Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:72.]

Passenger facility charge: A passenger facility charge was accurately defined during the hearings by the Chairman, Senator Finlay MacDonald, as "a head tax levied on people as they pass through an airport terminal." [Committee Transcript, Tuesday, August 22, 1995, Issue No. 14, 14:6.]

Neither of the original proposals mentioned anything about a passenger facility charge; nevertheless, the final agreement authorized PDC to impose a passenger facility charge if Air Canada was unable to pay its rent due to insolvency. Air Canada's financial troubles were well known, and the rent it would have had to pay would have increased dramatically under the negotiated deal.

The Government was given a right of approval of the passenger facility charge. However if the Government did not give its approval, the agreement provided that the developers would be released from their obligation to proceed with construction -- without giving up any rights under the agreements.

Senator Michael Kirby summed up the consequences for the travelling public that resulted from the combination of the passenger facility charge and the passenger diversion guarantee:

"When you say that there was to be a passenger diversion guarantee so that, in effect, passengers couldn't leave Pearson and go elsewhere, while simultaneously ... the company ... is allowed to charge a passenger facility charge, have you not essentially absolutely left the travelling public in an impossible situation? On the one hand, they can't go anywhere else because the government won't allow diversion of traffic and, on the other hand, these people have effectively the right to tax -- I use that in quotes, it's not a formal tax -- but the right to charge people. Where is the consideration for the consumer in all this?" [Committee Transcript, Thursday, August 3, 1995, Issue No. 10, 10:33, emphasis added.]

The Committee has yet to receive a satisfactory response.

Airline Rents/ Cost to Travelling Public: The disdain for the interests of the travelling public is nowhere more evident than in the provisions of the deal that impacted on the rents to be charged to the airlines. It was known by the Government from the beginning that the Paxport proposal called for a steep increase in rents charged to the airlines at Terminals 1 and 2. And it was known by the Government from the beginning that these costs would have been passed directly to the passengers.

Paxport's proposal required renegotiating the lease with Air Canada to double the rent Air Canada currently was paying, "immediately, with no construction." [Testimony of John Desmarais, Senior Advisor to the Assistant Deputy Minister, Airports Group, Committee Transcript, Tuesday, August 15, 1995, Issue No. 11, 11:107.] Mr. Desmarais testified:

"That cost would obviously have been passed on to passengers, so you were starting to build very serious costs quickly, without any pay-off to the airlines or anybody else. So there were very high costs to the airlines and to the travelling public, if we accepted the proposal at face value, although we did get a lot of rent." [Committee Transcript, Tuesday, August 15, 1995, Issue No. 11, 11:107.]

Air Canada understood very well that its costs, and the costs to its passengers, would skyrocket under the Paxport proposal. Its concerns were described in a memorandum from Mr. Rowat to the Minister of Transport, dated June 30, 1993. Mr. Rowat explained that Air Canada did "not share our optimism for growth in air traffic," and felt that "Mergeco was loading too much cost on the backs of the air carriers." He noted that, "They feel that their needs for additional terminal redevelopment are no longer urgent.... They do not want to see their cost competitiveness impacted by the degree envisioned by the Mergeco proposals." [T1T2 Redevelopment Project, Committee Doc. 00294.]

Air Canada argued that it was being asked to raise its charges to passengers exponentially, to a level that risked making it uncompetitive, all to pay for a development that it neither needed nor wanted, and to subsidize the high return to the Government promised by the developer. Nevertheless the Government forged ahead with the project -- and joined actively in the negotiations between Air Canada and the developers.

In the end, it was the Government that made the concessions necessary to bring Air Canada "in line" with the deal, thereby sacrificing the high return which had justified the selection of Paxport's proposal in the first place. Claridge's proposal, as the Evaluation Committee had noted, recognized the realities of the airline industry during the recession, and would not have required immediate renegotiations of the leases. The question persists: why was the Government so determined to bring this deal to a conclusion?

The "Air Canada Sandwich"

Many of the concessions made by the Government during the negotiations were justified to the Committee by the "Air Canada Sandwich": rights held by Air Canada, set out in a 1989 "Guiding Principles" document, that was not disclosed to the developers until very late in the process. The President of Claridge Properties Ltd. told the Committee that the revelation of these claimed rights was "devastating." [Committee Transcript, Tuesday, September 12, 1995, Issue No. 17, 17:14.] Their impact on the negotiations was enormous. However, the evidence shows that this impact was certainly exaggerated, and possibly even manipulated by certain of the parties for their own ends.

The background to the "Air Canada Sandwich" can be briefly described. In the late 1980s, Terminal 2 was in need of renovations. In 1989, Air Canada "came forward with a partnership proposal in which [Air Canada] would invest $65 million, three quarters of the cost of the total improvements to Terminal 2 domestic wing, the balance being paid by Transport Canada." [Testimony of Mr. Dominic Fiore, retired Senior Director, Corporate Real Estate, Air Canada, Committee Transcript, Wednesday, August 16, Issue No. 12, 12:75- 76.]

At that point, Air Canada had eight years left on its lease. As Mr. Fiore put it:

"In exchange for absorbing the lion's share of the investments in the rented facility, Air Canada and Transport Canada agreed to terms and conditions for a long-term lease on Terminal 2. The terms and conditions are referred to as the guiding principles for the Air Canada lease negotiations which are dated July 26 and signed, I believe, on August 1989." [Committee Transcript , Wednesday, August 16, Issue No. 12, 12:76.]

These "guiding principles," signed by Mr. Glen Shortliffe, then the Deputy Minister of Transport, referred to a "20-year lease term with two renewal options of ten years each for existing airline operational premises." ["Guiding Principles for Air Canada Lease Negotiations, Terminal II," dated July 26, 1989, Committee Doc. 00253.] Thus, it envisaged a possible 40-year lease between Air Canada and Transport Canada.

The legal status of this document, and its relevance to the T1/T2 project, was extensively discussed before the Committee. It was not mentioned expressly in the Request for Proposals, which referred to Air Canada's $65 million investment in Terminal 2, and stated only:

"Air Canada's capital investments were made with the expectation that it would have the ability to enjoy the benefits of those investments over a reasonable and normal amortization period. Air Canada currently has a lease for the space which it occupies in Terminal 2. The term of this lease and options to renew will terminate in 1997." [Request for Proposals, page 27.]

Dr. Huguette Labelle, Deputy Minister of Transport when the RFP issued in March, 1992, testified that the view of Transport Canada was that the only official legal document in effect between Air Canada and the Government was the lease that would terminate in 1997:

"I think Transport Canada always took the position that the lease that they had with Air Canada was the official legal document that would be, you know, guiding any relationship with Air Canada in the future. And when it expired, then, of course, you negotiated another deal -- another agreement but that, at that time, the guidelines would serve as guidance to the negotiation of the next agreement with Air Canada." [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:50.]

The Guiding Principles were not placed in the data room to which proponents had access as they prepared their proposals.

Mr. Broadbent first learned of the existence of this document when he had been "on the job a week or two," and in his words, he found it "alarming." [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:96.] He expressed great surprise that it had not been included in the data room, and he barely stopped short of suggesting it was a deliberate attempt by officials to sabotage the privatization project:

"How could an RFP go out in a department run by competent people when they know there's a document that promises to lease the thing that you're going out with an RFP to lease this to others?" [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:96-97.]

In fact, as the Committee learned, Transport officials were well aware of the Guiding Principles during the drafting of the RFP. A decision was taken that they did not belong in the data room, and that their substance should not be reflected in the RFP, because, according to Mr. Desmarais, it "was not a binding agreement. Only binding agreements went into the document room." [Committee Transcript, Tuesday, August 15, 1995, Issue No. 11, 11:32- 33.]

This decision was made easier by the fact that when Air Canada was consulted during the preparation of the RFP, it did not raise the 1989 guiding principles document. In its submission to Transport officials at the time, it asked "that its non-cancellable lease, which effectively extends through to April 30, 1997, be fully recognized and Air Canada's rights thereunder, including rental rate reviews based on current cost-recovery policies, be protected and maintained." [Letter from Mr. G.P. Mende, Manager, Airports Development, Air Canada, to Mr. Wayne Power, dated December 6, 1991, Committee Doc. 000483, page 520229.]

It also wanted a 30-year lease, plus two 15-year renewal options, as well as "full compensation for the unamortized cost of the $66.9 Million investment in the current renovation at Terminal II." [Letter from Mr. G.P. Mende, Manager, Airports Development, Air Canada, to Mr. Wayne Power, dated December 6, 1991, Committee Doc. 000483, page 520230.]

Evidently, then, at the time when the RFP was prepared, Air Canada was not taking the position that the 1989 Guiding Principles was binding or in effect.

The relevant provisions of the RFP were sent to Air Canada for its review and comments before the issuance of the RFP. No comments were received from Air Canada challenging that document or the statement that the lease and options to renew would terminate in 1997. [Fax dated January 3, 1992 from Mr. Wayne Power to Mr. Julien DeSchutter of Air Canada, Committee Doc. 000483, page 520233.]

Moreover, Paxport and Air Canada had enjoyed a very close working relationship throughout the period when the 1989 Guiding Principles were prepared, and this continued at least into July, 1991.<37> Beginning in June 1989, and continuing well into 1991, Mr. Hession held regular meetings with Air Canada officials to ensure that the airline was entirely familiar and happy with Paxport's plans for the airport, thus to position Paxport as a credible candidate in the eyes of Transport Canada.

As late as July 1991, Mr. Hession was reporting on meetings with Air Canada officials in which, "It became clear early in the meeting that we are held in high regard by Air Canada. They both made it clear that, if there is to be a private developer for T1/T2, they continue to want us. They also said that they do not now nor intend in the future to have discussions or dealings with any other developer." [Memorandum from Mr. Hession to Mr. Don Matthews and Mr. Jack Matthews, dated July 12, 1991.]

Indeed, Paxport and Air Canada had joined together in June, 1990, to submit an unsolicited proposal for the redevelopment of Terminal 2 to Transport Canada. Correspondence received from Mr. Hession documents discussions between Paxport and Air Canada regarding "the business plan that Air Canada and PAXPORT will rely upon as the basis for their business deal (lease, etc.) to be negotiated following a government decision." [Memorandum entitled "Air Canada/Paxport Proposal," from Mr. Ray Hession to Mr. Don Matthews, Mr. Jack Matthews and Mr. Peter Goring, dated May 29, 1990, Committee Doc. Ref: 5700-1.35/P1-13, 1-#0268.]

It strains credulity that Paxport would not have asked Air Canada about the terms of its existing lease. It is also difficult to believe that Air Canada did not mention the 1989 Guiding Principles, when they were prepared and signed at the very time Air Canada was engaging in discussions with Paxport.

Under questioning from Senator Céline Hervieux-Payette, Air Canada officials testified that their discussions with Paxport always were based on the 1989 Guiding Principles.

Senator Hervieux-Payette: And was this business plan or this financial arrangement with Paxport, in the unsolicited proposal, did you take into account the guiding principle...?

Mr. Fiore: ... I do remember saying that we did have an agreement for our phase 1, that we would enter into a long-term lease. And it defined all the terms and conditions for the long-term lease once the 1997 lease expired.

. . .

We were consistent throughout. Whether it was with Transport Canada, whether it was with Paxport or whether it was with PDC, we always were consistent in our principles, the long-term lease, the whole thing. [Committee Transcript , Wednesday, August 16, 1995, Issue No. 12, 12:86-87.]

Mr. Gordon Baker, the lawyer for the Matthews Group, denied that Paxport had any knowledge of the guiding principles. [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:9-10.] In a paper submitted to the Committee, he claimed that the guiding principles were "undisclosed to the proponents... [until] a letter to Jack Matthews, President of Paxport Inc. and Peter Coughlin, President of T3LP Co. Investments Inc. on June 16, 1993," and that this constituted "a gross misrepresentation" to the proponents. ["Analysis of Robert Nixon's Pearson Airport Review," by Gordon R. Baker, dated May 31, 1994.]

The documentary evidence does not support Mr. Baker's claims. A memorandum of a meeting on March 3, 1993, of the Deputy Minister of Transport, Mr. Richard LeLay (Chief of Staff to the Hon. Jean Corbeil, Minister of Transport), Mr. Keith Jolliffe and Mr. Robert Green of Transport Canada, and Paxport representatives, including Mr. Jack Matthews, shows that as of that date Mr. Matthews was well aware of Air Canada's position that it held a 60-year lease. The memorandum reports:

"Matthews stated that Air Canada's view is that they have a lease for 60 years and not just until 1997." ["Telcon Between Driedger/Heed/Desmarais and Barbeau/Jolliffe, March 4, 1993, Committee Doc. 00189.]

In any event, the effect of the dispute was clear. Air Canada used its leverage of the possible 40/60-year lease to defer the substantial rent increases required by the Paxport (now PDC) proposal. Meanwhile, the fear that Transport Canada officials had somehow been remiss in their obligation with respect to the RFP process gave Paxport and Claridge considerable leverage in their negotiations with the Government.

Mr. Broadbent testified that without the problem of the undisclosed 40-year lease document he was "firmly convinced that we could have concluded this deal on slightly better terms to the Crown." [Committee Transcript , Wednesday, August 2, 1995, Issue No. 9, 9:100.] There was indeed an "Air Canada Sandwich," but it was the Canadian Government -- and in particular the Canadian people -- who ultimately were squeezed in the middle.

Concessions Won by Air Canada -- And Lost by the Other Air Carriers

In the final deal, all of the $350 million Stage 1A and B construction was to go to Terminal 2 redevelopment. Air Canada agreed to pay higher rents after its existing lease terminated in May, 1997, in exchange for agreement from the Government to reduce its ground rent by 15%, which would then be passed on to the airlines by the developer. [See: Letter from Mr. Bill Rowat to Mr. Dominic Fiore dated September 21, 1993, Committee Doc. 000887; and see testimony of Mr. R.A. Morrison, Vice-President, Corporate Communications, Government and Industry Relations, Air Canada, Minutes of Proceedings and Evidence of the Standing Committee on Transport, Tuesday, May 31, 1994, Issue No. 8, 8:9; and see testimony of Mr. Rowat, Committee Transcript, Wednesday August 16, 1995, Issue No. 12, 12:9.]

Thus, in effect, the Government agreed to subsidize Air Canada and the other airlines by reducing the return to the Crown, in order to persuade the airlines to sign leases and to allow the deal with PDC to proceed. Again, this was contrary to the RFP, which had stipulated that the Government would not provide any subsidies.

The Canadian public was placed in the situation where they would bear the cost of this redevelopment project. The developers were clear that they were passing their costs on to the airlines, which would pass them on to their passengers. Canadians were supposed to benefit because the Government would receive a high return from the project. However, this return was reduced, not once but twice -- the $33 million rent deferral to subsidize the $96 million quickstart program, and the 15% rent reduction to subsidize the airlines' rent to the developers.

Transport Canada went even further to bring Air Canada "on side" with the deal: it excluded the other air carriers from the negotiating process. On June 29, 1993, the Airline Operators Committee - Terminal 1 Sub-Committee wrote to Paxport, the Hon. Jean Corbeil, and to Mr. Chern Heed (the General Manager of Pearson Airport) protesting against their exclusion from the negotiation process, and against the anticipated rent increases:

"The carriers of Terminal One were disturbed to learn that Transport Canada had previously instructed Paxport to discuss their redevelopment plans only with Air Canada. Our exclusion was not justified.

"During the presentation, Mr. Trevor Carnahoff clearly stated that the staging is directly related to a projected increase in passenger traffic from 20 million in 1992 to 35 million by 1999. How did you arrive at a 75% increase over this seven year period? Are you not aware that there has been negative traffic growth in the past five years? This projection is unrealistic.

"Equally unrealistic is your plan to recover the cost of your $750 million investment through increased retail sales, parking revenues and cost base leases. Terminal 3 was built using the same formula, which as all can see has thus far been a financial disaster. We cannot and will not put ourselves in a similar position.

"We would remind Paxport and the Government of Canada that the two major carriers (Air Canada and Canadian) lost, in the first 90 days of 1993, $4.5 million per day for a combined first quarter loss of $405 million. The U.S. carriers operating at Terminal 1 are facing the same financial difficulties.

"Is this the appropriate time to increase our operating costs at Pearson International Airport by 500%, which is a conservative estimate of what your $750 million proposal will do?

"Who will remain in business to pay for your extravagant folly? " [Letter from Carole Pitre, Chairperson, A.O.C. - Terminal 1 Sub-Committee to Paxport Inc., dated June 29, 1993, Committee Doc. 001088, emphasis in original document.]

Continued Warnings from Public Servants of Problems with Deal

The many defects in this deal are clear with the benefit of hindsight. However, the documents show the numerous attempts made by Government officials to point out these defects at the time.

For example, on July 20, 1993, Mr. Ian Clark, Secretary of the Treasury Board, wrote a memorandum to the President of the Treasury Board in which he stated that the Treasury Board Secretariat "has several concerns over the Pearson Airport initiatives." He enumerated the following:

• the government will likely pay a heavy price for T1/T2 redevelopment, in terms of winning Air Canada support and/or granting concessions to Mergeco;
• Mergeco is trying to push any risk back on the government through guarantees on passenger volumes, deferred rent and the likely introduction of a PFC, since Mergeco believes the government wants a deal at almost any cost;
• the overall risks to Mergeco are low, yet the projected rates of return are high (14 to 16% over the 57 year lease term);
• the airport could become inefficient since operations would be segregated in three separate leases (T1/T2, runways and T3), overseen by two layers of bureaucracy (Transport and an LAA); and
• the role of an LAA would become quite limited, with the government facing criticism for denying Toronto interests an opportunity to manage this airport under the umbrella of an LAA, as done last year for four other major airports.

"TBS would prefer that Transport pursue negotiations with the Toronto LAA on a fast track basis and transfer the responsibility for T1 and T2 and runway projects to that entity. This would be consistent with the policy adopted for other major international airports. However, this may not be possible on T1 and T2 unless the proposed deal being negotiated with Mergeco collapses." ["Memorandum to the President" from Mr. I.D. Clark, Secretary, Treasury Board, dated July 20, 1993, Committee Doc. 002052.]

The Treasury Board was not alone in insisting upon the deal's serious defects. A month earlier, Mr. Keith Jolliffe, one of the key members of the negotiating team at Transport Canada, had written a memorandum he entitled, "Blue Sky Thinking: Terminal Redevelopment Project -- LBPIA." Therein he listed each of the Government's objectives as set out in the RFP in seeking private sector interest in the redevelopment project. He then contrasted each of those objectives with the deal, noting in virtually every case how far the Government had abandoned its original purpose. The comparisons were appropriately entitled, "What's wrong with this picture?"

Among other things, Mr. Jolliffe noted that:

• Transport Canada's role as landlord would be considerably larger than anticipated, and not minimized as set out in the RFP;
• there would be no effective "synergies" linking the three terminals: Terminal 3 would be operated under a separate management structure, and by a separate entity, Lockheed Air Terminals; Terminals 1 and 2 would be operated by transferred former Transport Canada employees;
• with the rent deferral clause, the diversion clause and compensation, and other specified clauses, "the government [was] agreeing to underwrite private sector risk taking."

With respect to "an appropriate financial return for the Crown," Mr. Jolliffe noted that:

"Soft assurances or assumptions in the Paxport proposal have been replaced by the hard negotiations strategy of Claridge. This means that the deal is sliding down the financial slope of the Paxport return to the Crown towards ATDG proposed return to the Crown."

And that is exactly what happened. ["Blue Sky Thinking," dated June 24, 1993, Committee Doc. 002077.]

On September 14, 1993, Mr. Wayne Power wrote to Mr. Peter Coughlin expressing a number of concerns Transport Canada had with the deal. These concerns included issues of terminal capacity and the impact of the commitments made to Air Canada on other air carriers. For example, Mr. Power wrote:

"The Paxport Proposal emphasized the high capacity levels of the redeveloped terminals and it is apparent that public statements have created the perception of a major capacity increase. But, as you are aware, Transport Canada has expressed reservations as to the extent of the capacity increase in respect of the terminal complex generally and particularly in respect of gate/aircraft parking capacity. The redeveloped terminals will have essentially the same number of bridged aircraft gates as currently exists; yet access and control of gates are important components of the Air Canada agreement and of T1T2LP's access and pricing policy." [Letter from Mr. Wayne Power to Mr. Peter Coughlin dated September 14, 1993, Committee Doc. 001672.]

A draft reply dated September 19, 1993 was received from the consortium, and circulated among Transport Canada officials for comments. Mr. Power passed the draft reply to the chief negotiator, Mr. Rowat, with the following cover note:

"Instead of providing some comfort that there is a well thought out plan available, their draft response indicates that they are still very much in the concept stage and don't have the answers we or the airlines are looking for. There is no point in pressing for answers that don't exist at this time. " [Fax cover sheet from Mr. Power to Mr. Rowat, dated September 22, 1993, Committee Doc. 000730, emphasis added.]

Mr. Desmarais added his comments to those of Mr. Power, including a suggestion that the consortium "should be reminded that providing a pleasant place to wait is not the objective of the exercise." [Memorandum from Mr. J.N. Desmarais to Mr. Power dated September 22, 1993, Committee Doc. 000730.]

Nevertheless, fifteen days later the deal closed.

Non-Arms Length Contracts: Skimming the Cream Off the Top

Both Paxport and Claridge defended the deal as fair to Canadian taxpayers, stating that "during the first 9 years of the term of the Lease ... the Partners of T1T2 Limited Partnership receive no cash whatsoever." [See: "Schedule A to the Statement of Claim by T1T2 Limited Partnership Upon Her Majesty The Queen in Right of Canada," para. 1, submitted to the Committee on September 8, 1995 by Mr. Hillel W. Rosen on behalf of T1T2 Limited Partnership; and testimony of Mr. Peter Coughlin, President, Claridge Properties Ltd., Committee Transcript, Tuesday, September 1, 1995, Issue No. 17, 17:16.]

This statement ignores the evidence of the numerous side deals by which the consortium members were to benefit from the Pearson Airport redevelopment. It is accurate that technically the contracts which surfaced during the Committee's investigations were not with the partners of T1T2 Limited Partnership. They were, however, with related corporate entities -- either parent companies of T1T2 partners, or sister companies, or other companies owned and controlled by the same persons who controlled a T1T2 partner (eg. Mr. Don Matthews and Mr. Jack Matthews).

These contracts would have allowed the consortium members to earn considerably more from Pearson than the 14% negotiated after-tax rate of return found by Deloitte & Touche<38>. Mr. Stehelin of Deloitte & Touche was very clear in the report which found the 14% rate of return to be reasonable:

"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%. We are ascertaining the total of these amounts on a pre-tax basis and will comment on these under separate cover." [Report from Deloitte & Touche dated August 17, 1993, page 6.]

This further calculation was never done. [Testimony of Mr. Paul Stehelin, Committee Transcript, Thursday, August 17, 1995, Issue No. 13, 13:22.] However, Mr. Stehelin testified that under the regime proposed by the consortium, a number of expenses would be "buried in a number called 'management fee.'" [Committee Transcript, Thursday, August 17, 1995, Issue No. 13, 13:21.] Other fees, which included development fees and consulting fees to Matthews Group companies, Mr. Stehelin characterized as "abnormal expenses. They weren't presently or directly related to operating the airport." [Ibid.] Mr. Stehelin agreed that some of these amounts would be "money to the investors over and above the money they would get as investors in terms of the rate of the return." [Ibid.]

The following is a brief summary of the agreements for which evidence was presented to the Committee:

1. The most unusual of these agreements is one dated October 4, 1993, between T1T2 Limited Partnership (signed by both Mr. Peter Coughlin and Mr. Norman Spencer), and Matthews Investments 4 Inc. -- a company that does not appear anywhere else in the documents.<39> The document states, in its entirety, that:

"[T1T2 Limited Partnership] hereby agrees to pay to you a consulting fee of $350,000 per annum for ten (10) years (payable monthly) commencing with the first payment on October 31, 1993.

"This contract may not be terminated for any reason and is assignable and may be assigned by you." [Committee Doc. 001573]

This is an undertaking to pay $3.5 million as a "consulting fee," but with absolutely no mention of any consulting, or indeed any other services to be provided. The "no termination" clause ensures that the contract could not be terminated if no services were ever provided, let alone if the services were unsatisfactory.

Senator John Bryden observed during the hearings, "[T]his looks to me very much simply like a promissory note. I promise to pay $350,000 per year for 10 years commencing on October 31st." [Committee Transcript , Thursday, September 28, 1995, Issue No. 28, 28:17, emphasis added.] And it could be fully assigned, at will, by Matthews Investments 4 Inc. to anyone -- to Mr. Don Matthews, to Mr. Jack Matthews, or theoretically even to a friend.

2. Matthews Contractors Inc. was engaged as "Construction Manager for the Pearson Terminal Redevelopment Project" by letter dated October 4, 1993 from T1T2 Limited Partnership. That letter is lacking in detail: it notes vaguely that, "The extent of these services and the fees therefore are to be generally as per the proposed agreement previously delivered to you." The referenced agreement was not provided either to the Department of Transport or the Committee. [See: Letter dated October 4, 1993, attached as Exhibit 11 to the Affidavit of John N. Desmarais, No. 3, in the Ontario Court (General Division) litigation between T1T2 Limited Partnership and 2922797 Canada Inc., and Her Majesty the Queen in Right of Canada, Court File No. 94CQ55762.]

According to a corporate search of Matthews Contractors Inc., that company was only formed on September 29, 1993, leading one to speculate whether it was formed for the sole purpose of entering into this contract.

3. Paxport International Inc was to get a minimum of $4 million over five years from T1T2 to promote Canadian airport development expertise and technology internationally. While apparently unrelated to the management and operation of Pearson Airport, this undertaking was referred to in a covenant from T1T2 in the Industrial Benefits Agreement, one of the Pearson Airport contracts. It would appear that the $4 million was to come out of the revenue from Pearson Airport -- notwithstanding that its purpose, while ostensibly to benefit Canada, was at bottom to develop new business opportunities for Paxport. [See: Article 3.3 of the Industrial Benefits Agreement between T1T2 Limited Partnership and Her Majesty the Queen in Right of Canada, dated October 7, 1993.]

4. Agra Industries Limited had an agreement dated May 15, 1992 with Paxport Management Inc, which provided:

"In consideration of AGRA's participation in the consortium, AGRA will be entitled to, on a preferred basis, as determined by the project manager, perform engineering and related services for performance of the redevelopment of the airport facilities."

Agra Industries Limited was the controlling shareholder in 2895820 Canada Limited, a partner in T1T2, and also the majority shareholder of Allders International Canada Limited, which owned two of the T1T2 partners.

In addition, Allders International Canada Limited had a 25-year lease to operate the duty-free shops at Terminals 1 and 2.

5. Norr Partnership Limited was to perform planning, architectural and engineering services, and overall design co-ordination for T1T2. Norr Partnership Limited was a shareholder of Norr Group Consultants Ltd, which in turn was the owner of 1027777 Ontario Limited, a partner in T1T2.

6. Pearson Airport Management was engaged by T1T2 to manage Terminals 1 and 2. Pearson Airport Management is a partnership with Claridge Holdings Inc. as one of the partners.

7. On October 4, 1993 Bracknell Corporation entered into 2 agreements with T1T2:

(1) a management and operations agreement; and

(2) an agreement for the installation of mechanical, electrical and communications cabling.

Bracknell Corporation owned 1045433 Ontario Inc. and 1045434 Ontario Inc., both partners in T1T2.

8. Patrick Brigham, "as a founding member of the Paxport Group" (Mr. Brigham and the Brigham family owned Hartay Enterprises, Inc., a partner in T1T2 Limited Partnership) was granted exclusive rights to provide travel agent services at all three terminals at Pearson Airport. This agreement was dated October 4, 1993, although not accepted by Mr. Brigham until November 10, 1993 -- well after the defeat of the Conservative Government, and indeed after the appointment of Mr. Nixon to review the Pearson Airport deal. [See: Agreement dated October 4, 1993, attached as Exhibit 5 to the Affidavit of John N. Desmarais, No. 3, in the Ontario Court (General Division) litigation between T1T2 Limited Partnership and 2922797 Canada Inc., and Her Majesty the Queen in Right of Canada, Court File No. 94CQ55762.]

9. Lockheed Air Terminal of Canada Inc. ("LATOC") concluded a "consulting agreement" with T1T2 Limited Partnership, dated October 4, 1993. LATOC owned LAH Limited, the limited partner in T1T2 Limited Partnership. Under this agreement, LATOC was to receive $450,000 each year for 7 years or until the completion of the redevelopment of Terminals 1 and 2, whichever was later. In exchange, LATOC was to serve as a "consultant" in connection with the management, operation, development and redevelopment of Terminals 1 and 2. [See: Agreement dated October 4, 1993, attached as Exhibit 10 to the Affidavit of John N. Desmarais, No. 3, in the Ontario Court (General Division) litigation between T1T2 Limited Partnership and 2922797 Canada Inc., and Her Majesty the Queen in Right of Canada, Court File No. 94CQ55762.]

These contracts alone would have brought in over $170 million to these entities, according to their own claims in the pending litigation with the Government of Canada. This $170 million would have been over and above the negotiated rate of return that the Government had decided would have been fair for the developers.

Perhaps the most serious problem with these non-arms length contracts was the essentially blank cheque written by the Government to the developers. The Government gave up any significant ability to control self-dealing by the consortium. The Pearson Airport agreements provided only that the Government had a right to receive copies of non- arms length contracts; while the contracts were supposed to be on terms "commercially equivalent to those which could be negotiated with an Arms Length party," no power was given to the Government to reject, to challenge, or to approve the terms of any such agreement. [See: Article 2.5, Terminals 1 and 2 Complex Development Agreement.]

The Government did not even ask to exercise its minimal right to review the non- arms-length contracts. The Hon. Jean Corbeil, then Minister of Transport, testified that he had no knowledge of the $3.5 million contract to Matthews Investments 4 Inc., the only non- arms-length contract he was asked about. The first time he saw that contract was when presented with it during these hearings. [Testimony of the Hon. Jean Corbeil, Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:91.]

The Committee saw strong evidence of the Government's failure to exercise oversight over the non-arms-length contracts. The negotiating team, which had agreed that the Government would subsidize the airlines' share of the airport operating and management costs, admitted that they simply did not know whether these non-arms-length payments would be included in those costs, and thus subsidized by the Government as well as the airlines and the travelling public. [Testimony of Mr. John Desmarais, Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:83-84.]

Other Unusual Clauses

Mr. Stephen Goudge (legal counsel to Mr. Nixon) expressed concern that the contracts permitted:

"a number of deductions on the issue of gross revenue that, from my perspective after consultations, were unusual. That is, unusual in the sense that provided deductions that would understate what in other circumstances would be the gross rent. For example, rent paid by the Crown, bad debts, and so on." [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:13.]

He later commented on these clauses, noting that Pearson Development Corporation would have been allowed to deduct from its calculations of gross revenues "many generous deductions, unusual ones [such as] rebates and refunds, payments by Her Majesty as occupant of leased premises, bad debts...." [Id, 27:51-52.]

Other terms were also unusual, and these terms "inadequately protected the public interest." [Testimony of Mr. Stephen Goudge, Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:12.] For example, the agreements, the raison d'être of which was to develop Terminals 1 and 2, did not provide for reversion of the terminals to the Crown in the event not all the development took place:

Mr. Goudge: [T]he term of the agreement provides for 57 years, regardless of whether or not the development beyond Stage 1B takes place.... An agreement whose purpose is redevelopment ought to provide, in my judgment, and particularly in this context, that if the development does not proceed, the leasehold interest returns to the Crown. The whole purpose of this was to get the development done.... Why the Crown should permit the property to remain with the lease holder if the development was not going ahead escaped me, particularly with an asset of this importance. [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:12-13.]

Mr. Goudge also found that the remedies given the Government if the developers defaulted on their obligations under the agreements, were seriously deficient. The only remedy provided was for the Government to take the airport back, and to run it. As Mr. Goudge testified:

"The whole object of this was for the Crown to get out of this business and, in the event of default to force an entire reversal of that is something that, because it is so Draconian, is almost certainly not to be exercised." [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:14.]

Mr. Goudge explained that the government would have the option of stepping in:

"in the middle of a development that was partially completed and try to take over the operation. From my perspective ... that would be a disaster for the Government of Canada. There would be nothing worse than coming into the mess of a development where the developer had walked out.... The mess for the travelling public and for the Government of Canada couldn't have been worse, in my judgment." [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:40-41, emphasis added.]

Other provisions also protected the interests of the developer at the expense of the public interest. For example, the provisions governing the mortgagee's rights to enforce its security under the leasehold mortgage gave very little protection to the Government. The Committee learned that in case of a default under the leasehold mortgage, the mortgagee would acquire extensive rights, with little (if any) power given to the Government to object:

"The mortgagee could enforce the security without a requirement that it complete further stages of construction, and it could then assign the lease to another lender, and the Government of Canada would be left with an operator of the airport over whom the Government of Canada had no control. In other words, the Government of Canada would be left with not T1T2 but somebody, the identity of whom, the wherewithal of whom the Government of Canada would have no control over." [Testimony of Mr. Stephen Goudge, Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:14, emphasis added.]

The agreement did not give the Government of Canada any power to withhold its consent to the mortgagee's assignment of the lease of the terminals. "All of a sudden the Government of Canada is dealing with a new tenant without any ability to control who the tenant is." [Ibid.] That new tenant could be anyone, including even a non-Canadian controlled developer who would not have qualified to submit a proposal for the project under the terms of the Request for Proposals.

The Return to the Investors

The Committee learned that the pre-tax rate of return to investors under the Pearson Airport deal was to be 23.6% -- a rate well in excess of any return the investors could have expected in the market. As a consequence of permitting such a high rate of return, the government would have lost over $250 million over the term of the lease. Mr. Allan Crosbie, a senior financial analyst with Crosbie & Company, testified:

Mr. Crosbie: Under the deal, the government deal was valued at $842 million or $843 million. If the return to the investors had been 17.5, which -- I'll give you some background -- we think is perhaps something they could shoot for --

Senator Bryden: No, I just needed -- Let the figures speak for themselves.

Mr. Crosbie: The government would have got another $200 million on top of the $843 million.

Senator Stewart: So they left $200 million on the table, then.

Mr. Crosbie: Under this, yes, $200 million, it would appear, could well have been left on the table over 37 years.

Senator Bryden: No, over 57 years that would have been 252?

Mr. Crosbie: Over 57 years that would have been $252 million -- that's right, about one-quarter of a billion dollars. [Committee Transcript , Thursday, September 28, 1995, Issue No. 27, 27:21.]

Mr. Crosbie also told the Committee that the 23.6% figure could well have been low. First, it did not include or reflect the fees that would have been paid to consortium members under the various non-arms-length contracts -- and the evidence shows that these would have yielded millions of dollars.

Second, the model used by Transport Canada in assessing the return was not prepared independently by or for Transport Canada, but was prepared by Pearson Development Corporation itself. [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:22-23.] As Mr. Crosbie noted,

"[I]t's highly unusual for a buyer to present an optimistic model to the seller. The buyer, I think, typically would present quite a conservative model because you're not going to go to a seller and say, 'Geez, look what a great deal I've done.'" [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:23.]

Notably, this was the first time the Committee learned that the Department had used a model provided by the developer.

The Department based its conclusion that the 14% after-tax rate of return was reasonable on the opinion of Mr. Paul Stehelin of Deloitte & Touche, set out in a letter dated August 17, 1993. However the Committee learned that, "although the letter was written in August, [Mr. Stehelin] was basing ... it off the higher rates in the spring." [Testimony of Mr. Crosbie, Committee Transcript, Monday, November 6, 1995, 1300-7.] The letter was not updated "to reflect the rates that were closer to the rates that were in place at the time the letter was written." [Ibid.]

The Deloitte & Touche report relied on a Price, Waterhouse report in finding the 14% after tax rate of return to be reasonable. However, the Committee was told that the Price Waterhouse report had referred to a pre-tax rate of return of 11% to 13% as reasonable. [Id., 1300-6.] That figure would have been consistent with the results of a report prepared by DS Marcil for Transport Canada on a different project. In that report, DS Marcil suggested "a pre-tax equity return for the equity investors of 14.5 per cent, slightly more than the Price Waterhouse but in the same general range." [Ibid.]

Finally, the projected before-tax equity rate of return on the Terminal 3 project was 14.1 per cent. [Id., 1300-7.]

The evidence is overwhelming that the 23.6% before-tax rate of return was considerably higher than was necessary or appropriate. Mr. Crosbie testified that "the returns may, in fact, be higher than 23.6." [Id., 1300-12.] This return would be increased if one factored in the:

"additional profits potentially to the participants through their involvement in the concessions, the construction and the management fees.... Plus, you have synergies when you put T3 together with T1T2. Transport Canada told us they thought these synergies of putting these two together could be in the order of $2 million. Plus, you now have virtually a monopoly situation where you have got control of these terminals in the hands of one party ... which creates opportunities in terms of pricing...." [Committee Transcript, Monday, November 6, 1995, 1300-11-12.]

The rate of return to the investors under this deal was very generous, and directly at the expense of the travelling public (higher fares) and the Crown (lower rate of return).

VI. Signing of the Contract

By late August, 1993, the negotiating team had succeeded in resolving the most difficult issues that had divided the parties. [Testimony of Mr. Bill Rowat, Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:14.]

On August 27, 1993, the Order in Council was issued, authorizing the Minister of Transport to enter into the agreements on Pearson Airport. [Order in Council, dated August 27, 1993, Committee Doc. 001345.] Mme. Jocelyne Bourgon, then Deputy Minister of Transport, was very clear that the effect of this authorization was to grant the Minister of Transport the "additional power" required in order to sign the agreements, but:

"[T]o have the power to sign is not an obligation to sign .... It is not a judgment on the circumstances. So to have delegated authority does not force you to exercise it." [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:61, emphasis added.]

On August 30, 1993, the Minister of Transport announced that a "general agreement" had been reached to redevelop and to operate Terminals 1 and 2, and that this would be finalized in the fall. [New Release Communiqué No. 187/93, dated August 30, 1993, Committee Doc. 002269.]

Legal counsel who testified were definite: as of August 30, 1993 -- and indeed, right up until October 7, 1993 -- there was no contract between the parties. When he testified, Mr. Robert Green, Q.C., Senior General Counsel, Department of Transport, explained that he had specifically asked that the word "general" be included in the press release to clarify that as of August 30, there was no agreement between the parties:

Mr. Green: ...I do remember asking that the word "general" be put in because I did not -- was not aware that an agreement had been entered into, did not think one had and understood this to be, as Bill [Rowat] already alluded to it, simply a strong statement that the minister wanted to make.

. . .

Senator Lynch-Staunton: ... What's the difference between a general agreement and an agreement? What is a "general agreement", then?

Mr. Green: As I understood it at the time, the message I was trying to convey to that was simply that there was no agreement. There was maybe an understanding, but I don't know. [Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:44.]

In fact, the witnesses described how "serious negotiation" continued right up until the signing. Mme. Bourgon testified that, "We were still negotiating 24 hours before I asked the minister to sign some of the documents." [Committee Transcript, Thursday, September 14, 1993, Issue No. 19, 19:86, emphasis added; see also testimony of Mr. Jacques Pigeon, Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:14.]

Mr. John Desmarais of Transport Canada told the Committee how one document was not completed by late September, and in fact, as late as September 20, 1993, the government negotiators were telling the consortium that they would not close the deal until that document was finalized:

"We, at August 27th, did not have a management and operations plan. That was a substantial piece of negotiations during September, for the plan and the agreement itself, and in fact at one point we said, on September 20th, that we weren't willing to close unless that was finalized." [Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:15.]

The Department of Justice officials explained that the Terminal 1 and 2 transaction was "a one-tier transaction." [Testimony of Mr. Jacques Pigeon, Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:9.] In consequence, "parties will sign documents in advance, not with the intent of binding themselves at the moment they sign them but simply as a matter of administrative procedure so that they would be ready for closing, assuming all the other conditions precedent to that closing are met, or the parties otherwise agree to the closing itself." [Testimony of Mr. Robert Green, Committee Transcript, Monday, October 23, 1995, Issue No. 29, 29:24.] In other words, as Mme. Bourgon succinctly expressed it: "[I]t is not over until it is over." [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:86.]

Mr. Rowat was emphatic in a letter to our Chairman:

"It was my view at that time, and it is still my view now, that the Pearson Contract was not concluded unless and until all the documents were signed by the parties, including those signed on October 7, 1993, and all necessary release from escrow had taken place, which event occurred only after Peter Coughlin and I had signed the Authorization to Release Escrowed Documents." [Letter from Mr. Rowat to Senator Finlay Macdonald, dated September 22, 1995.]

The evidence of the public servants was definite. In their view there was no binding agreement until October 7, 1993. Mr. Stephen Goudge agreed, noting that, "There is no law of 'semi-contract'." [Committee Transcript, Thursday, September 28, 1995, Issue No. 27, 27:32.] Mr. Goudge went on to state his legal view that "the contractual rights at issue here speak as of October 7th, not before."

When questioned by Mr. Nelligan regarding whether the government would have been liable for damages if it had not proceeded to close the transaction, Mr. Goudge replied: "We had no detailed discussion ... about that.... My own view would be that to stretch any doctrine of law to take in potential damages other than contract damages in this circumstance would be difficult." [Id ., 27:37.]

On September 8, Parliament was dissolved; the election campaign began. At the same time, several news stories appeared in the press, exposing problems with the projected deal and with the process that had been followed. [See: "Response to points raised in the Greg Weston Citizen articles of Saturday, September 25, 1993 and Sunday, September 26, 1993," dated September 28, 1993, Committee Doc. 001266.]

The projected deal became a major issue in the campaign. On October 5, 1993, the Leader of the Opposition, Mr. Jean Chrétien, said publicly: "I challenge the Prime Minister to stop that deal right now.... You don't make a deal like that three weeks before an election when hundreds of millions of dollars are at stake.... I'm proposing a very simple thing -- put it in the fridge for three weeks and let the government that is there deal with it after [the election.]" [Quoted by Patrick Doyle and Bruce Campion-Smith, "Halt deal at airport Chrétien tells PM," The Toronto Star, October 6, 1993.]

The next day, Mr. Chrétien was even more explicit. "I'm warning everyone involved: If we become the government, it will be reviewed, and if legislation is needed [to overturn the deal] we will pass legislation." [André Picard and Jane Coutts, "Chrétien attacks Pearson deal," Globe & Mail, October 7, 1993.]

When the time came to close the deal in October, Mr. Rowat consulted with his Deputy Minister as to whether or not he should proceed:

Senator Bryden: Is it normal for the Prime Minister to direct a contract to be signed?

Mr. Rowat: These were not normal circumstances. So under normal circumstances, no, it would not.

Senator Bryden: What was different about these circumstances?

Mr. Rowat: There was an election under way, and this was a particularly contentious issue. So in speaking to the deputy minister, Jocelyne Bourgon, she had drawn the conclusion, as had I, that if I were to sign these documents as a senior civil servant at this point in time, I should have very explicit instructions. It was to her and I suppose Glen Shortliffe to sort out exactly how and who should provide these instructions. [Committee Transcript, Thursday, August 3, 1995, Issue No. 10, 10:75-76.]

Mme. Bourgon elaborated on this point, explaining that with the dissolution of Parliament came the need for the public servants to satisfy themselves that indeed the government wished to make the agreement. Accordingly, around the end of September (before submitting the documents to the Minister of Transport for his signature), Mme. Bourgon sought political guidance from her Minister. [ Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:57.] She described the situation to the Committee:

"After Parliament was dissolved, what happens in terms of conduct for officials is that there is this general rule. It's not a law. There is a general rule that from that point on, you must act with caution. So the question comes, who is going to make a judgment as to whether or not you're cautious. Well, that's not a judgment for officials. You go to your minister or the first minister, the Prime Minister, depending on the circumstances." [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:59.]

Even though an election was underway, the Hon. Jean Corbeil, Minister of Transport, proceeded on October 4 to sign a number of the documents. This was the first step in that Government's attempt to bind its successor to this deal.<40>

After the Minister of Transport had signed some of the documents and before the deal was scheduled to close on October 7, two events occurred which caused Mme. Bourgon to seek explicit direction from the Prime Minister whether or not to proceed. She described what happened:

Mme. Bourgon: Following that, there were two events, additional events, that took place. One of them was you have to remember that this is during the middle of an election campaign. There was a statement by the Leader of the Opposition requesting publicly the Prime Minister to put everything -- I think he used the expression -- in the freezer.... The day after,... on the 6th, I believe there was also a statement by the Leader of the Opposition to the effect that he would wish, should he form the government, to review the approach.

These two events raised in my mind the need to receive guidance on the appropriateness of proceeding further, which is closure on the 7th, but this time from the Prime Minister. Because the Prime Minister is responsible for the behaviour of government during a period of election. And the call having been made at the level of the Leader of the Opposition, in my mind, it was not sufficient to simply ask guidance from the minister at that point in time. So that was the background.

Now, it's not for the Deputy Minister of Transport to get on the phone and call the Prime Minister and say, "I wish to get guidance." You refer the matter to the clerk, whose job it is to make sure that we respect tradition and values and due process and so on. And when I raised my view with the clerk, the clerk was also of the view that it was appropriate to seek guidance from the Prime Minister. He did and gave me my instruction." [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:59-60.]

Mme. Bourgon told the Committee that the Prime Minister need not have proceeded with the closing.

Senator Tkachuk: The Prime Minister didn't have to sign any contract.

Ms. Bourgon: No.

Senator Tkachuk: What did she have to do?

Ms. Bourgon: She had to indicate what was the wish of the Leader of the Government as to the appropriate behaviour of her government during that period of time....

Senator Tkachuk: So if she would have said "no", then the wishes of the Treasury Board and all the ministers would have been turned down.

Ms. Bourgon: If the Prime Minister had said, "It is the wish of my government to defer agreements of this kind for the next three weeks," then we would have got people together and found all the options possible to give material effect to that wish. [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:89.]

To implement her instructions, on October 7, 1993, Mme. Bourgon faxed a message to Mr. Rowat, with copies to Mr. Shortliffe, Mr. John Tait (Deputy Minister of Justice), and the Hon. J. Corbeil:

1) The Prime Minister, the Right Honourable Kim Campbell, has instructed Mr. Glen Shortliffe to proceed with the signature of the remaining legal documents concerning the transfer of T1/T2 this afternoon at 14 00 hrs.

2) The Minister, the Honourable Jean Corbeil, has been informed of this decision and is in agreement.

3) You are therefore authorized to sign the relevant documents on behalf of the Crown.

4) The above has been reviewed by Mr. Shortliffe and he has confirmed that these are the explicit instructions received from the Prime Minister." [Fax to B. Rowat from J. Bourgon, dated October 7, 1993, Committee Doc. 00092.]

These instructions were implemented. On that day the balance of the documents were signed, and the Pearson Airport Agreements were the result.

But it was clear to public servants that the controversy surrounding this deal was not going to die down. The Committee was shown an unusual exchange of electronic mail among several Treasury Board officials, beginning with a note from Mr. Andy Macdonald to Mr. Mel Cappe, Mr. Ian Clark, Mr. Richard Paton and Mr. Jean-Guy Fleury, dated October 12, 1993:

"At the DM retreat last week, Jocelyne Bourgon asked my advice on a study she was contemplating... a review of the entire decision and advice process in the Pearson Airport decision. She is more than a little concerned that some public servants might get hung out to dry on this one at some future date, and wanted to have a complete file on the entire process. I said that it sounded like a reasonable thing to do, but that I would touch base within the TBS to solicit other reactions from affected parties. What do you think about this proposal?" [Committee Doc. 002068]

Mr. Cappe sent off his assent quickly -- half an hour later:

"Andy, we should prepare a complete file on this. Sid, could you pull our stuff or at least a chronology on it together should the AG or the next gov't decide to do something." [Committee Doc. 002068]

There is an interesting handwritten note on the page, apparently from Mr. Ian Clark:

"I tend to like this. It is going to get public anyway." [Committee Doc. 002068]

And of course, Mr. Clark was correct; it did "get public."

Signing During the Election Campaign

The most outrageous act of the previous Government in this entire story was the decision to enter into the contract after Parliament had been dissolved, and that Government was fighting for its existence in a general election. It was evident by then that the Conservative Government was headed for defeat. If the deal was good, it would still be good three weeks later. Deep suspicions were raised about the virtues of the agreement by the Government's obvious fear that the deal might not be acceptable to a different Government. Otherwise, why did they not agree to wait until after the election to have the deal signed?

The issue of the propriety of Ms. Campbell's decision to make this controversial contract during the election was considered by the Committee. The witnesses confirmed that such action flew in the face of established Canadian practice; one witness stated categorically that Ms. Campbell's actions demonstrated an unprecedented "reckless disregard for propriety." [Testimony of Professor John Wilson, Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:15.]

Mme. Bourgon, now Clerk of the Privy Council, testified that it is the practice of the Canadian Government to act with caution during an election. She elaborated:

"I think the general rule of conduct to act with caution during an election means that you would consider factors such as: Is it a transaction that is going to bind future governments? What is the -- are there alternatives? Are there urgencies in the matter? Is there an obligation to act? Is there controversy?" [Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:100.]

Professor John Wilson, a professor of political science at the University of Waterloo, testified that there is at least a practice in Canada, and possibly even a constitutional convention, that should have restrained the Campbell government from signing the Pearson Airport agreements during the election.

In Australia, this convention is explicit, and in fact, committed to writing. Known as the "caretaker convention," it requires a Government "to avoid implementing major policy initiatives, making appointments of significance or entering major contracts or undertakings during the caretaker period [after a dissolution of Parliament]..." [ Committee Transcript, Monday, September 25, 1995, Issue No. 25, 25:34.]

Professor Wilson analyzed the testimony of Ms. Bourgon on the practice of the Canadian Government during an election period, and observed, "Madam Bourgon effectively stated the existence, I think, of the caretaker convention in Canada." [Committee Transcript, Monday, September 25, 1995, Issue No. 25, 25:14.] He went on:

"It may be impossible to be absolutely certain on the points I want to mention now, but I'm unaware of any examples, and indeed I should be unaware of any examples in the years since the end of the First World War of governments in Canada in the caretaker period behaving with such reckless disregard for propriety as, in my view, Prime Minister Campbell showed when she authorized the final signing of the Pearson Airport Agreements on October 7, 1993.

"The issue was very clearly one of considerable controversy. The then Leader of the Opposition had vowed to cancel the agreement if his party won the election, which ought to have enough, in my view, on the basis of the examples I've described, to stop the process. An enormous amount of public money was involved, and the agreement locked the Government of Canada into a very long-term leasing arrangement which equally should have made it an inappropriate candidate for decision-making in the caretaker period, and it wasn't urgent, as we now know, I understand.

"But most importantly -- and in my particular view of the way in which the system operates I guess I'm bound to say this -- most importantly, I think, the decision was clearly made at a time when the Prime Minister and those around her must have known that her government was likely to be defeated. The Gallup poll published on September 22 showed the Liberals at 37 per cent and the Conservatives at 30 per cent, down from 36 in August. The Gallup poll published a month later, on October 21, put the Conservatives at 16 per cent.

"Now, I don't have to see internal party polls to know that around October 7, midway between those two dates, the government was very likely at 20 per cent, or not very far away from it. Whatever was being said for publication, I don't believe for one minute that the Prime Minister was not aware of that catastrophic political situation. The hard facts of the case must therefore be that she chose to authorize the signing of the Pearson Airport agreements at a time when she knew that she would not be able to take responsibility for the consequences of that decision. And that looks very close to me like the work of a government which has already lost the moral authority to govern. To say that her decision was a constitutionally inappropriate exercise of power is, in my view, to put it mildly, but in the context of our customs and those of other parliamentary systems it, in my view, is also enough to justify whatever steps have to be taken to terminate the agreement." [Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:15-16, emphasis added.]

The two other political scientists testifying before the Committee were reluctant to say that Ms. Campbell's actions breached a constitutional convention -- that term is used in different ways by different authorities. However, Professor Andrew Heard of Simon Fraser University criticized the signing in the middle of the election campaign, saying, "It's not in keeping with past political practice and it's I think an issue that certainly raises the question of whether it was prudent or not." [Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:42, emphasis added.] Professor J.R. Mallory of McGill University did not mince his words, describing the signing as "bizarre and imprudent." [Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:43, emphasis added.]

Of course, the Canadian electorate was unequivocal in its condemnation of that Government's actions. The Committee saw correspondence sent to Ms. Campbell from citizens in Mississauga, protesting her ministers' "cavalier" attitudes to Mississauga residents, that "had achieved new heights in arrogance." One of those who wrote anticipated the residents' concerns manifested in reports:

"such as... "The Report of Twenty-seven Million Taxpayers watching their Government Give Tory Hacks Canada's only Profitable Airport." You will soon be reading these reports. They will be delivered one at a time into a ballot box." [Letter from Mr. Lawrence Mitoff to the Hon. Garth Turner, dated October 2, 1993, Committee Doc. 002314.]

Mr. Mitoff added a postscript: "Please consider this my resignation from the Progressive Conservative Party. Attached is my membership card."

Mr. Mitoff was not alone. The Progressive Conservative Party of Canada was reduced from one hundred and fifty-two seats to two seats in the House of Commons; and in Ontario, home of Pearson Airport, every one of the Conservative candidates for election was defeated.

VII. Review by Mr. Robert Nixon And Cancellation

Consistent with his promise, one of Mr. Chrétien's first acts after the election was to appoint Mr. Robert Nixon, former Ontario Treasurer, on October 28, to review "all factors relating to the agreement between Pearson Development Corporation and Transport Canada for the redevelopment of Terminals 1 and 2 at Lester B. Pearson International Airport; and produce a report by November 30, 1993." [Articles of Agreement, Consulting and Professional Services between Her Majesty the Queen in Right of Canada and Mr. Robert Nixon, Committee Doc. 002348.]

Mr. Nixon engaged Mr. Stephen Goudge, a lawyer with Gowling, Strathy & Henderson, and Mr. Allan Crosbie, a financial adviser with the specialty merchant bank of Crosbie & Company, to assist him in his review.

Mr. Nixon was assigned a difficult task, made more challenging by the time constraints -- time constraints that were necessitated by the new Government's desire to move forward expeditiously with respect to Pearson Airport. (At that time, of course, the Government could not foresee that its actions to implement its chosen policy would be frustrated by the Conservative majority in the Senate.) However it is plain from the evidence that Mr. Nixon and his team were able to identify and to consult enough individuals so as to obtain sufficient insight into the substance and process of the Pearson Airport deal, and to arrive at recommendations for the Prime Minister.<41>

Clearly Mr. Nixon and his advisers could not, within one month, meet with all those heard by this Committee over four months. They did meet with representatives of both Claridge and Paxport, Transport Canada officials, community representatives, including representatives of the Toronto LAA, to name a few. They then analyzed the agreements, to ascertain whether or not the provisions were in the best interests of Canada.

This analysis was conducted by Mr. Goudge, an eminent lawyer, who looked at the provisions from a legal perspective, and by Mr. Crosbie, who was able to examine the financial provisions and put them in an appropriate context for Mr. Nixon's consideration. Indeed, this Committee benefited considerably from insights into the substantive agreements provided by Mr. Goudge and Mr. Crosbie.

Mr. Nixon concluded as follows:

"My review has left me with but one conclusion. To leave in place an inadequate contract, arrived at with such a flawed process and under the shadow of possible political manipulation, is unacceptable. I recommend to you that the contract be cancelled." ["Pearson Airport Review," dated November 29, 1993, Tab "O" of the Committee Briefing Book.]

On December 3, 1993, the Prime Minister of Canada released Mr. Nixon's report to the public, announcing as he did so that the Government would cancel the contract for the privatization of Terminals 1 and 2. [Press Release, Office of the Prime Minister, dated December 3, 1993, Tab "O" of the Committee Briefing Book.]

VIII. Issues

A number of issues are raised by this evidence:

1. Why did the Government adopt a "private sector solution" for Terminals 1 and 2 at Pearson Airport?
2. Was there an alternative solution for Pearson?
3. Was the Request for Proposal process consistent with government policy?
4. Was there political interference with the process?
5. Were lobbyists allowed excessive access and influence?
6. Notwithstanding the process, was the final deal in the best interests of Canada?
7. Was it proper for the Government to direct the execution of this controversial deal during the election campaign?

Each of these will be considered below.

IX. Conclusions

1. Why did the Government adopt a "private sector solution" for Terminals 1 and 2 at Pearson Airport?

The evidence is clear that, as Mr. Glen Shortliffe testified, the decision to privatize Terminals 1 and 2 at Pearson Airport was "a departure from the generally announced LAA policy." The departure was justified by both Mr. Shortliffe and the Hon. Doug Lewis, former Minister of Transport, on the grounds that it was needed "to address what was perceived as a crisis at Pearson." [Testimony of Mr. Glen Shortliffe, Committee Transcript, Thursday, July 1, 1995, Issue No. 4, 4:70.]

However, the evidence shows that by the time the Request for Proposals (the "RFP") was issued, there was no crisis at Pearson. The recession had hit the airline business in Canada "like a tidal wave." [Testimony of Mr. Dominic Fiore, Air Canada, Committee Transcript, Wednesday, August 16, 1995, Issue No. 12, 12:76.] Increased passenger volumes were nonexistent.

No one wanted the redevelopment to proceed: Air Canada was on the record opposing it, as were Canadian Airlines and the rest of the airline industry. The Air Transport Association of Canada made repeated representations to the Minister of Transport, asking that the Government delay any redevelopment until the recession had ended, passenger traffic had revived, and the airlines could afford the rent increases the redevelopment would entail. These pleas were barely acknowledged, and certainly were not heeded. The Association received a reply to their November 29, 1991 letter to the Minister the following May -- two months after the RFP issued. [Testimony of Mr. Gordon Sinclair, Committee Transcript, Thursday, August 17, 1995, Issue No. 13, 13:78.]

Even Claridge, who ultimately controlled T1T2 Limited Partnership, had opposed the issuance of the RFP, saying it was neither needed nor wanted by the industry. They even offered, should their predictions of traffic levels be wrong, to make renovations "at their own cost... in a matter of months, at no cost to the Government [that] would provide ample capacity beyond the year 2000." This offer was not accepted. [Letter from Mr. Peter Coughlin to the Hon. Gilles Loiselle, dated November 13, 1991, Committee Doc. 001137.]

The only advocates for the redevelopment project were the Paxport consortium -- a group lead initially by Mr. Don Matthews, Mr. Jack Matthews, and Mr. Ray Hession: individuals with impeccable connections to the very top of the Conservative Government and throughout the public service, but who are notably lacking in any airport experience. Mr. Jack Matthews told the Committee how he would regularly be asked, at the beginning of meetings to promote Paxport as a contender for the project, "Jack, what business do you have in the airport business?" He could only point to his rejected proposal for the Terminal 3 project. [Testimony of Mr. Jack Matthews, Committee Transcript, Thursday, September 21, 1995, Issue No. 22, 22:130.]

Why did the Government proceed to issue the RFP in March 1992? The answer may have been provided by Mr. Don Blenkarn, Conservative Member of Parliament for Mississauga South. While openly declaring that he was in favour of selling off the airports to pay down the national debt, Mr. Blenkarn wrote to the Hon. Jean Corbeil three days before the RFP was issued, saying, "What comes through to all sorts of people critical of our government is some sort of a quick pay off to friends who want to develop airports.... [The other Mississauga MPs] and I know the close relationships that [a] number of the proponents of airport reorganization and their relationship with our Party and how supportive they have been in the past. In our view, the name of the game is to get elected....[T]he whole proposal at this point does not balance and our detractors clearly know that." [Letter from Mr. Don Blenkarn to the Hon. Jean Corbeil, dated March 13, 1992, Committee Doc. 000996.]

Did the Government have to proceed with the project? Clearly not; as late as November, 1992 -- after the proposals had been evaluated but before the announcement of the selection results -- the Prime Minister had asked the Clerk of the Privy Council to look into bid compensation for the proponents. However, compensation would have covered only the proponents' costs in preparing the proposals; it would not have provided any part of the profit expected to accrue over the life of the lease to the firm with the winning proposal. This option was not pursued; the project continued.

2. Was there an alternative solution for Pearson?

The Toronto Local Airport Authority, known as the Greater Toronto Regional Airports Authority ("GTRAA"), was at all relevant times willing and able to negotiate with the Government to take over Pearson Airport. This approach would have been consistent with the Government's policy for airport management, and consistent with developments at other major airports throughout Canada.

At every stage, however, the GTRAA encountered obstacles placed by the Government. The evidence shows that a different standard was imposed for the GTRAA than was imposed for each of the local airport authorities ("LAA's") in five other major Canadian cities. And the evidence is equally clear that the decisions which created this double standard were made by the Minister of Transport himself.

The Hon. Doug Lewis, then Minister of Tranport, could give the Committee only one reason why he did not pursue the LAA option for Pearson: the "crisis" at Pearson demanded urgent action, and the Government could not wait for the LAA for Pearson. However, as described above, by the time the RFP was issued in March 1992, there was no crisis at Pearson. In fact, the airline industry (including Air Canada and Canadian Airlines) was arguing strenuously against any steps to develop Pearson at that time.

Furthermore, Mr. Michael Farquhar, the Transport Canada official responsible for negotiating airport transfers to all emerging LAA's, testified that by June 1992, there was a group in Toronto with whom Transport officials could discuss airport transfers. [Committee Transcript, Tuesday, July 25, 1995, Issue No. 5, 5:79.]

The main excuse given by the Minister of Transport for refusing to recognize the GTRAA was the insistence by the Region of Peel that the Toronto Island Airport be included within the transfer of airports to the GTRAA. But it became clear that this was but an excuse. When the Minister of Transport provided this rationale in a letter to the GTRAA refusing them recognition, officials added a handwritten notation to the permanent file copy: "Notwithstanding the above observations, the Toronto LAA already would appear to meet the government's prerequisites for becoming a LAA consistent with the criteria applied to the first four LAA's." [Committee Doc. 000549]

The evidence shows that a similar difference of opinion between the federal government and a local municipality regarding whether a second local airport ought to be within the jurisdiction of the local LAA had not impeded the transfer of Edmonton International Airport to an LAA in Edmonton. The Minister of Transport "was very familiar with the Edmonton situation." [Testimony of Mr. Michael Farquhar, Committee Transcript, Thursday, July 27, 1995, Issue No. 7, 7:49-50.]

Why was the Government so solicitous of the concerns of one local municipality (out of 35)? The same Government flatly ignored a strongly worded resolution of the Toronto City Council expressing its "opposition to the privatization of Terminals 1 and 2" and requesting "that the Government of Canada re-open and reverse its decision, permitting further consideration." [Letter to the Rt. Hon. Kim Campbell from Deputy City Clerk, City of Toronto, dated October 18, 1993, Committee Doc. 002086.]

There is extensive evidence that by the time the RFP process was underway, and certainly by the time negotiations began with the developers (May 5, 1993), there was an LAA in place willing and able to negotiate a transfer of Pearson Airport. The excuses given for not proceeding with the Toronto LAA were clearly lacking in substance. The question remains, why did the Government insist upon a different policy for Canada's most profitable airport? The only possible conclusion is that the Government had a different agenda for that airport.

3. Was the Request for Proposal process consistent with government policy?

Mr. Stephen Turner, Director, Central Government Services Review Directorate, told the Committee that the Government of Canada procurement process is "founded on three fundamental operating principles: Competition , which for us means open bidding; equal treatment, which ensures that all suppliers are treated according to the same conditions and evaluated according to the same criteria; and the last one is openness and transparency." [Committee Transcript, Wednesday, July 1, 1995, Issue No. 3, 3:106, emphasis added.] Mr. Al Clayton, Executive Director, Bureau of Real Property and Material, confirmed that these same principles govern leasing contracts such as the Terminal 1 and 2 deal. [Committee Transcript , Wednesday, July 1, 1995, Issue No. 3, 3:107.]

These were not the governing principles of the T1T2 process.

The Transport officials believed an expression of interest stage should be used, as it had been for Terminal 3. [See, eg, "What are the various ways that a developer can be retained?" dated January 8, 1991, Committee Doc. 001063.] They went so far as to prepare a draft call for expressions of interest. [Testimony of Mr. Wayne Power, Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:13, and draft "Call for Expressions of Interest," dated June 5, 1991, Committee Doc. 001060.]

Only Paxport opposed an expression of interest stage; Of the other two known potential bidders, Canadian Airports Limited advocated a two-stage process, while Airport Development Corporation (which became Claridge) opposed the whole redevelopment as unnecessary. [Committee Doc. 001114]

Paxport lobbied hard against an expression of interest stage. The Minister overruled his officials, and ordered that, "There will be a single stage proposal call process, i.e. no Expression of Interest or Qualification stage." [See: Memorandum from L.A. McCoomb to V.W. Barbeau dated August 21, 1991, Committee Doc. 001047.]

At the same time that Paxport was arguing that an expression of interest stage was unnecessary because three interested developers were already known, it was also pressing for the disqualification of the other bidders. Paxport was successful with one -- Canadian Airports Limited may not have qualified because of the Canadian control requirement in the RFP. Happily for Paxport, they were not successful in disqualifying Claridge; that company eventually rescued Paxport from losing the project altogether.

There was abundant evidence that the Government knew that a 90-day period to respond to the Request for Proposals was inadequate and would deter potential proponents. Price-Waterhouse recommended that a six-month period be used. [See, eg, Memorandum from Mr. Chern Heed to Mr. V. Barbeau dated October 29, 1991, Committee Doc. 000639.]

Paxport lobbied the Minister heavily for a short response period. Again, the Minister overruled his officials, and ordered, "The RFP will require that proposals be submitted 90 days from release of the RFP." [Memorandum from L.A. McCoomb to V.W. Barbeau, dated August 21, 1991, Committee Doc. 001047.]

The combination of having a one-stage process, and then allowing only 90 days to respond to the RFP, meant that it was impossible for new groups to enter the competition on a level playing field. Mr. Hession testified before the House of Commons Standing Committee on Transport that Paxport found the 90-day period "extremely demanding. I had to create, virtually overnight, a team of 60 people concentrated in a particular office in Toronto, to work seven days a week about 20 hours a day for the entire period, to succeed in getting that proposal submitted." [Minutes of Proceedings and Evidence of the House of Commons Standing Committee on Transport, Thursday, May 26, 1994, Issue No. 7, 7: 19.]

If Paxport itself, which had been created for the single purpose of going after this particular project, and had been gearing up for this RFP since 1989, found 90 days almost too demanding, how could any newcomer possibly hope to succeed?

Why did the Government chose not to emulate the process used for Terminal 3 -- which witnesses told the Committee has now become a model of how public proposal calls should be handled -- for Terminals 1 and 2? Witnesses testified that the Terminals 1 and 2 project was much more complicated than the Terminal 3 one, but the contrast in approaches was striking.

While the Terminal 3 project proceeded first with a call for expressions of interest and then an RFP, the Minister insisted personally on a one-stage process for Terminals 1 and 2. While a full seven months elapsed before the call for expressions of interest and the due date for proposals on the RFP for Terminal 3, the Minister directed that there be only 90 days to prepare and file the proposals for Terminals 1 and 2. [See: testimony of Mr. Wayne Power, Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:18, 38; testimony of Mr. Ed Warrick, Committee Trancript, Wednesday, July 1, 1995, Issue No. 3, 3:27, 37.]

The Minister similarly accepted Paxport's representations and overruled his officials with respect to waiting for the results of the environmental assessment review of the runway project.

On May 16, 1991, Mr. Chern Heed was able to say that, "Clear commitments have been made to the public that no steps to expand the capacity of Pearson Airport will be taken until after the results of the environmental assessment review is known." [Memorandum dated May 16, 1991, Committee Doc. 001161.]

Paxport lobbied hard to convince the Minister that there was no need to wait for the results of the environmental assessment. And the August 21, 1991 memorandum records the Minister's explicit direction, "The RFP may be released prior to completion of the EARP review of the Department's proposal to construct new runways at LBPIA." [Memorandum from L.A. McCoomb to V.W. Barbeau, dated August 21, 1991, Committee Doc. 001047.]

The rumour that the Government was going to proceed with the RFP prior to the EARP report was enough to make at least two members of the EARP panel threaten to resign. [Letter from Mr. Peter Coughlin to the Hon. Gilles Loiselle, dated November 13, 1991, Committee Doc. 001137.]

The RFP was issued on March 16, 1992 -- five months before the EARP report was released on November 30, 1992. That report found that there was "no likelihood that passenger aircraft movement demand will reach the levels projected ... for 1996 before the year 2001 and maybe even later; there is no serious and continuing problem of traffic congestion at Pearson at the present." [Committee Transcript, Wednesday, July 26, 1995, Issue No. 6, 6:17.]

The criteria used to evaluate the proposals were the weightings lobbied for by Paxport. Paxport wanted (understandably) to minimize the weight given to the proponent's financial strength, and to maximize the weight accorded the promised "return to the Crown." [See, e.g., letter from Mr. Hession to Dr. Huguette Labelle, dated January 18, 1991.]

The evaluation criteria -- which were approved by the Minister -- allotted only 5 per cent of the weighting to the proponents' financial qualifications; while of the 40 per cent points assigned to the proponents' business plan, 50.6 per cent was allotted to the proposed return to the Crown. [See: Proposal Evaluation Report, Committee Doc. 001765; testimony of Mr. Ron Lane, Committee Trancript, Wednesday, July 26, 1995, Issue No. 6, 6:59-60.]

The evaluation process was severely hampered by not having a proper basis for comparison with what would have happened had Transport Canada undertaken the redevelopment itself. A Transport Canada document noted that "[Paxport's] proposal would imply an attractive financial return to the government.... However, the Evaluation Report has made no comparison of the return to the government under [Paxport's] proposal with a 'business as usual' assumption under a continued government operation of the airport. A so- called government base case was not undertaken as part of the RFP exercise." [See: "Considerations related to the potential redevelopment of Terminals I and II," dated November 3, 1992, Committee Doc. 001445.]

The Committee learned that it was the Minister who expressly ordered that no such "Crown Construct" base case be prepared. [Memorandum from L.A. McCoomb to V.W. Barbeau, dated August 21, 1991, Committee Doc. 001047.]

It is evident from the Evaluation Report that the Evaluation Committee was well aware that the Paxport plan was precarious, especially when compared with the plan submitted by Claridge. Claridge's Business Plan was described as "a sound, conservative and achievable Business Plan, which recognizes the current financial realities of the airline industry in establishing a pricing strategy (low charges for the short-term, 1 - 8 years or so, rising only after Phase 1 construction is completed in 1998)." [Proposal Evaluation Report, Committee Doc. 001765, p. 90.]

In contrast, "the critical assumption in [Paxport's] Business Plan is that a large portion of the capital costs as well as the payments to the Crown can be passed on to the airlines, and that it will be possible to renegotiate airline leases to conform to their pricing strategies and levels.... Any of these matters could result in [Paxport] having to scale down the scope of the project or to delay redevelopment, particularly Stage 1. They could also cause reductions in payments to the Crown, as well as bring into question the financial viability of the proposal." [Proposal Evaluation Report, Committee Doc. 001765, p. 90.]

Nevertheless, Paxport's proposal was selected as the best overall acceptable proposal. And as anticipated, the failure of Paxport to recognize the current financial realities of the airline industry, and their own lack of a solid financial base, meant that they could not finance their proposal. Within just a few days of the announcement that their proposal had been selected, they were negotiating a merger with Claridge.

One is forced to wonder whether this was not simply a process to ensure that Paxport got "a piece of the action" with funding from Claridge's deep pockets, rather than a true open competition. The entire process, from start to finish, seemed crafted to ensure the selection of Paxport's proposal, against logic, experience and simple common sense. Why select a proposal that on its face required radical increases in airline rents, at a time when the major Canadian airlines were on the verge of financial collapse? Why discourage new competitors by setting the 90-day deadline? And why ignore the financial ability of the proponent to carry out the proposal, in assessing each proposal's merits?

If all this was not calculated to enhance Paxport's chances to win the proposal, then it was an example of bad management: it was a gambler's roll of the dice with Canada's largest and most important gateway to international markets. And it is clear from the evidence where responsibility for these decisions lies -- the Minister(s) of Transport, and the Prime Minister of Canada.

4. Was there political interference with the process?

This was probably one of the most difficult issues before the Committee. Without access to Cabinet or ministerial documents, or discussions between public servants and ministers, it was impossible to learn whether there was any political interference. However, it was clear from the evidence that there was an unprecedented level of interest taken in this transaction on the part of the Privy Council Office; an Office which received its directions directly from the Prime Minister. [See, eg: Testimony of Mr. David Broadbent, Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:109.]

The Prime Minister seems to have been more attentive to the file than was the Minister of Transport; certainly he was better briefed. [Compare, e.g., testimony of Mr. Glen Shortliffe, Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:65- 66, with the testimony of the Hon. Jean Corbeil, Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:24; Memorandum to the Prime Minister from Mr. Shortliffe, dated December 4, 1992, Committee Doc. 002184, with testimony of the Hon. Jean Corbeil, Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:24.]

The Prime Minister was advised of the numerous concerns of Transport Canada and others about proceeding with the project in November 1992 -- including "concern with the inequity of the arrangement (over $1.0 billion in revenue in exchange for only $150 million in work," and "the negative impact it would have on... the deficit" -- yet the project went forward. It is notable that the memorandum from Mr. Shortliffe to the Prime Minister of November 16, 1992 does not present a single reason why the project should proceed. [See: Memorandum to the Prime Minister from Mr. Shortliffe dated November 16, 1992, Committee Doc. 002188.]

The Clerk of the Privy Council, Mr. Glen Shortliffe, held weekly meetings "to keep every one on track." [Memorandum from Mr. Paul Gonu to Mr. Al Clayton, dated May 6, 1993, Committee Doc. 000417.] And he was reporting back to the Prime Minister with detailed up-dates on the status of the negotiations.

The Committee was given written memoranda from Mr. Shortliffe to the Prime Minister documenting briefings given every two weeks, and sometimes more often. When asked about this "truly unbelievable" level of interest displayed by the Privy Council Office, Mr. David Broadbent agreed: "I can't think of a comparable situation either." [Committee Transcript , Wednesday, August 2, 1995, Issue No 9, 9:109.]

The Committee saw extensive evidence of "strong pressure" on officials to conclude the Pearson agreements by May 31, 1993. [See, eg, Memorandum from Ms. Carole Swan to Mr. Sid Gershberg, dated May 10, 1993, Committee Doc 00272] Memoranda from the Department of Finance noted that "Transport officials have been working at a furious pace to meet the goal of signing final agreements by the end of May." The officials warned that the insistence on meeting this deadline had its cost: "No doubt, PDC feels it has an upper hand in negotiations." [Memorandum from Mr. Robert Fonberg to Mr. Michael Francino, dated May 17, 1993, Committee Doc. 002072.]

The pressured pace of the negotiations worried officials: "Within weeks, the government will be bound by the terms of a 57 year lease.... We are concerned that PDC will soon be in a position to charge "monopolistic" fees.... Clearly, if this deal stands, a communications plan should be developed which defends the higher prices and ground rents." [Memorandum from Mr. Robert Fonberg to Mr. Michael Francino, dated May 17, 1993, Committee Doc. 002072, emphasis in original document.]

The Committee learned that this pressure came directly from the Prime Minister; he was determined to get the deal concluded before he relinquished his position to Ms. Campbell. [See, eg, testimony of Mr. Glen Shortliffe, Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:74.] Eventually, even Mr. Mulroney had to accept the fact that he could not push the deal through before leaving office. Mr. Shortliffe reported to him that "delays by Paxport and Claridge in clarifying the status of Mergeco have slowed progress on the file." [Memorandum to the Prime Minister dated April 8, 1993, Committee Doc. 002097.]

The file was passed to the Rt. Hon Kim Campbell. She too showed no qualms about intervening to get the deal done before the election in October 1993. Two and a half weeks before the election, when it was well known from the polls that the Conservatives were headed for defeat, she personally directed the Chief Negotiator to proceed with the execution of the agreements.

The Committee saw other evidence of pressure exerted from the Prime Minister's Office. A handwritten memorandum of a meeting on June 14, 1991 with Mr. Richard Lelay, Chief of Staff to then Minister of Transport, the Hon. Jean Corbeil, noted: "Real issue is delinking: pressure tremendous, PMO down." [Committee Doc. 000585.] That memo also notes: "Issue is can dept. put it together so that it doesn't blow up on everyone!!"

The Prime Minister did not shrink from letting the Clerk of the Privy Council, Mr. Glen Shortliffe, know that he wanted his friends "to get a piece of the action." [Testimony of Mr. Shortliffe, Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:65.] And this is what happened: within a matter of days after the announcement that the Paxport proposal had been selected, Paxport and Claridge were discussing a merger. And the merger was described in internal Transport documents as "a product of PCO/politicians." [Meeting Notes of a March 18, 1993 meeting, Committee Doc. 00007.]

Inevitably Mr. Mulroney's activities in a similar lease negotiation in 1988 come to mind, where the Ontario Court of Justice found that several "extraordinary" things occurred<42>:

"Frustrated by the progress of negotiations, John Bitove Sr. ("Bitove Sr."), the Chairman of Bitove Corporation, did an extraordinary thing. He called a political friend, the then Prime Minister, Brian Mulroney, and sought his intervention in this matter. Not many Canadian citizens have direct access to the Prime Minister and can have his ear over complaints about the pace and course of negotiations with a government department. But 1988 was an election year and Bitove Sr. was a significant fund-raiser for the Conservative Party. It is even more extraordinary that the Prime Minister would become involved in what seemed to be essentially private commercial negotiations. However, as a result of this initiative by Bitove Sr., the Prime Minister contacted Glenn Shortliffe, the Deputy Minister of the Ministry of Transportation and Communications ("Shortliffe") and advised him to resolve the problem. Shortliffe immediately removed the existing negotiating group at Transport Canada." Canada (Attorney-General) v. Bitove Corp., [1995] O.J. No. 2627, Court File No. B31/94A, Ontario Court of Justice, September 14, 1995 (Lederman, J.), para. 50.

In the Pearson case, complaints from Paxport about the pace of negotiations resulted in Mr. Victor Barbeau being removed from his responsibilities as Assistant Deputy Minister, Airports, and sent home on "gardening leave." Indeed, the government team was almost completely different at the end than it was at the beginning: over the life of the deal, Transport Canada went through three Ministers, three Deputy Ministers, and four Chief Negotiators. This resulted in a striking lack of continuity. One is forced to ask whether personnel were changed with a view to finding someone who would make the deal "happen."

An internal Paxport memorandum reported complaints heard from a Transport Canada official "about the political interference in the process. [The official] bemoaned that the government, having made a decision about the future of the terminals, didn't sit back and allow the public servants to get on with the process in an orderly fashion 'just like Terminal 3'." [Memorandum entitled "Coordination with Transport Canada at LBPIA," from Mr. Dale Nankivell to Mr. Jack Matthews, dated April 15, 1993, Committee Doc. 001104.]

That the Minister of Transport flatly overruled advice from his public servants on numerous occasions is well documented -- refusing to call for "expressions of interest," proceeding to issue the RFP without waiting for the results of the environmental assessment review panel on runways, insisting on a 90-day response period for the RFP, and refusing to prepare a "Crown construct" base case scenario for use in assessing the true value to the Crown of the proposals. [See, eg, Memorandum from L.A. McCoomb to V.W. Barbeau dated August 21, 1991, Committee Doc. 001047.]

These interventions did not end with the conclusion of the RFP process. There were a number of issues during the final negotiations on which the consortium made certain demands. Though Transport officials recommended strongly against their acceptance, the Minister directed that the questionable terms be accepted. These included the $33 million deferral of rent to the government, and the passenger diversion guarantee.

The public servants could only keep notes, to protect themselves from being "hung out to dry." [E-Mail from Mr. Andy Macdonald to Mr. Mel Cappe and three others, dated October 12, 1993, Committee Doc. 002068.] As early as June 17, 1991, internal memoranda were noting: "Paper trail - Min[ister] can overrule us ... but audit trail on decisions." [Memorandum of meeting dated June 17, 1991, Committee Doc. 000585]

Mr. Barbeau, when asked whether the Request for Proposal process for the Terminal 1 and 2 project was unusual, stated:

"Is it unusual? Again, this calls for a value judgment on my part and I can't pronounce myself on that. What is normal, abnormal, usual, unusual, the fact of the matter is we had, as public servants, direction from the government to do things in a certain way, and that's what we did." [Committee Transcript, Tuesday, July 11, 1995, Issue No. 2, 2:69.]

5. Were lobbyists allowed excessive access and influence?

While it is always difficult to specify with any certainty how much lobbying is acceptable, and at what point it becomes excessive, in this case the Committee saw clear evidence of extraordinary influence by those lobbying the Government, and of extraordinary rewards from the private sector to lobbyists -- all costs that would be claimed back, before profit, from Pearson revenues. In particular:

• Mr. Hession conducted a carefully choreographed lobbying assault on everyone who could in any way be helpful or relevant to Paxport winning the Pearson contract. His diaries for 1990 - September, 1993 [the only diaries produced for the Committee] are filled with lunches and dinners at the Rideau Club, Hy's Steak House and the Parliamentary Restaurant, with golf games, as well as dozens of meetings with Cabinet Ministers, their political staff, chiefs of staff to the Prime Minister, as well as persons reputed to be close to Prime Minister Mulroney, persons such as Mr. Sam Wakem (also a law partner of Mr. Gordon Baker, the lawyer for the Matthews Group), the Hon. Guy Charbonneau, and Dr. Fred Doucet, who later himself became a registered lobbyist for Paxport.
• Mr. Hession engaged a team of lobbyists, headed by Mr. Bill Neville, to assist in this campaign. Mr. Neville was also on retainer throughout this period from Air Canada, and then, while still invoicing Paxport for lobbying services, headed Ms. Campbell's transition team, which moved key personnel involved in the Pearson file.
• Mr. Hession recruited Mr. Andy Pascoe to join his team of lobbyists. Mr. Pascoe formerly was the individual on Transport Minister Lewis' staff who was responsible for the Pearson redevelopment file. He saw or had access to all the unsolicited proposals submitted for the Terminal 1 and 2 project. As a representative of the Minister's office, he attended meetings with Paxport's competitors and Transport Canada officials. Thus he had access to extensive confidential information about Paxport's competition and what they would likely be proposing for the Airport, as well as confidential information about the concerns and priorities of Transport Canada. And he joined Paxport just before the RFP issued -- precisely when that information would have been most valuable to Paxport and its principals.
• Paxport lobbyists were able to obtain "full debriefings" of senior Cabinet Committee meetings that impacted directly on the Pearson project. The proceedings of these committees are supposed to be kept secret, for at least 20 years. But Mr. Hession revealed that it was "not uncommon" for Paxport to receive such information. He seemed genuinely surprised that we thought this extraordinary and shocking -- and his surprise at our reaction itself speaks volumes.
• Paxport entered into two contracts with Dr. Fred Doucet, a long time close personal friend and senior staff member of Prime Minister Mulroney. Those contracts would have paid Dr. Doucet over $2 million in lobbying fees, and they were contingent on Paxport signing the Pearson contracts.
• Paxport entered into a contract with Mr. Hession to pay him a "post-employment package" of $83,750 each year for the rest of his life. If he died before his wife, she would receive $41,875 each year for the rest of her life. This is a generous pension for four years lobbying -- and the money would have come right out of Pearson revenues.

The effectiveness of this lobbying campaign is evident throughout this report. Paxport lobbied successfully for the Government to ignore the advice of the public servants, and obtained a single-stage process (no expressions of interest); an RFP with a short response period (90 days rather than the recommended 6 months); an RFP in advance of the EARP report; bidder qualifications in the RFP so as to disqualify one of its most serious competitors; emphasis for the "return to the Crown" in evaluating the proposals, and minimal weight for the proponent's qualifications to carry out the proposal, financial or otherwise; and then, when the Deputy Minister refused to direct officials to begin negotiations with Paxport after Deloitte & Touche found they could not finance their proposal, "lobbyists were abuzz" and persuaded the Minister of Transport, in effect, to direct the result.

We can understand the lobbyists' efforts to represent the interests of their clients forcefully. But we strongly object to the fact that the Government was prepared to change public policy and make new rules in response to these representations, often against the considered judgment of public servants, against good business judgment, and finally, against the best interests of the country. This is not the process the Government of Canada should have followed in deciding the fate of Canada's largest airport -- and in negotiating a deal that would last 57 years.

6. Notwithstanding the process, was the final deal in the best interests of Canada?

While it is difficult to dismiss the defects in the process, the final deal must be evaluated objectively, on its merits. Serious questions remain regarding the terms of the final deal. These questions more than justify a decision to cancel the agreements.

The Committee heard undisputed evidence that the Government was relying on out- of-date information when it concluded that the rate of return to the consortium under the final deal was fair and reasonable. For example, Deloitte & Touche's August 17, 1993 report that found the 14% after-tax return was fair and reasonable, was based on "the higher rates in the spring," and had not been updated to reflect the interest rates that were in place when the letter was written. [Testimony of Mr. Allan Crosbie, Committee Trancript, Monday, November 6, 1993, 1300-7.]

The Deloitte & Touche report also relied on a Price Waterhouse report when it concluded that an after-tax return of 12 to 14% was reasonable. However, the Price Waterhouse report was referring to a pre-tax rate of return of 11 to 13%. And this would have been consistent with other studies, such as that of D.S. Marcil prepared for another Transport Canada study, which found a pre-tax rate of return of 14.5% to be reasonable. [See: Testimony of Mr. Allan Crosbie, Committee Trancript, Monday, November 6, 1993, 1300-6-7.]

In fact, the pre-tax rate of return in the Terminal 1 and 2 project was 23.6% -- substantially higher than the rates found to be reasonable in these studies. And even this high figure did not tell the whole story. It did not reflect the numerous side deals from which the members of the consortium were going to enrich themselves.

The non-arms length agreements were of significant concern for several reasons: (1) they added up to millions of dollars of Pearson revenues that were to be skimmed off the top by consortium members; (2) the consortium members were noticeably reluctant to disclose information about these contracts -- officials had to try to piece them together, and fix each one within the complex web of related companies; indeed, Deloitte & Touche reported frankly that they were unable to obtain information about these contracts, and therefore had not reflected their yield in the rate of return; and (3) the Government gave away any effective right to control this self-dealing by consortium members.

Government documents produced for the Committee indicated that "Mergeco is well insulated from any increase in construction costs; as well, there is little incentive for them to save in construction costs." [See: "Comments on Sensitivity Analysis To-Date," May 31, 1993, Committee Doc. 00212.] This is particularly disconcerting when one realizes that Matthews companies were retained to do the construction. So, Mr. Matthews and company had "little incentive" to exercise restraint or fiscal responsibility in performing the construction services. They would get paid in full for this work (however excessive), plus take home their share of the 23.6% profit return.

And while some of the non-arms length contracts may have been fair and reasonable, others were patently excessive, inappropriate, and would not be acceptable in any usual business transaction.

For example, there was the one-page contract, signed on October 4, 1993, whereby T1T2 Limited Partnership promised to pay $3.5 million to Matthews Investments 4 Inc. -- a company that does not appear anywhere else in the records, and about which we could find out very little, except that Mr. Don Matthews is the President/Chairperson. This money was labelled a "consulting fee," but it could have been called anything, including a gift: there were no obligations placed on Matthews Investments 4 Inc. to do anything to earn this money. The contract was very clear that it could not be cancelled or terminated for any reason. It could, however, be fully assigned by Matthews Investments 4 Inc., so that Mr. Matthews could assign the $3.5 million to anyone -- himself, his son, or a particularly helpful friend. Yet this was a contract to be paid out of Pearson revenues, supposedly as part of the redevelopment project.

Other non-arms length contracts included a $4 million fee to Paxport International, so that Paxport International could promote Canadian airport development expertise and technology internationally. In other words, Pearson Airport was to subsidize Paxport's self- promotion for other contracts in the world market.

In addition, there were contracts to non-arms length parties to serve as a "consultant" in connection with the management, operation and redevelopment of Terminals 1 and 2 -- precisely the services, one would have thought, the consortium was undertaking to provide in exchange for their 23.6% return.

The list goes on and on. (These contracts are enumerated in greater detail in the report's description of evidence.) And the bottom line is clear: millions of dollars of Pearson revenues would have gone to enrich individuals and companies undertaking activities that should not have been paid for by Pearson airport, that is, by the travelling public.

Other aspects of the final deal, too, were not in Canada's best interest. The Government, having accepted Paxport's proposal because it offered the best return to the Crown, promptly agreed to reduce this return, and not just once but twice. First, it agreed to defer $33 million in rent for the first three years, even though officials warned that there was "no source of funds" to make up this loss for the Government. [See: Memorandum to Mr. Glen Shortliffe from Mr. Bill Rowat, dated May 25, 1993, Committee Doc. 002194.] Then, the Government agreed to reduce its ground rents by 15%, to enable the consortium to pass these savings on to the airlines, and cushion them from the rent hikes required by the proposal.

Again: the problem of the rent hikes to the airline industry was known and anticipated at the time of the Evaluation Report It was a problem that would have been avoided by the competing Claridge proposal. So we have a situation where the Government selected a particular proposal because of the high rents promised the Crown; those high rents were dependent on raising the costs to an already-strapped airline industry; and the Government agreed to reduce its rents, to help that industry afford this proposal. It certainly appears that if the Government was determined to proceed to privatize Terminals 1 and 2, the Government, the airline industry, and the travelling public would have been better off accepting the competing Claridge proposal over the Paxport one from the very beginning.

Did the Government wilfully ignore market conditions in the airline industry, and the likely impact that would have upon the proposal and the return to the Crown? The Prime Minister had been warned, back on December 4, 1992, that Paxport could learn "in a matter of weeks ... that their proposal is not workable under current circumstances in the airline industry." [See: Memorandum for the Prime Minister from Mr. Glen Shortliffe, dated December 4, 1992, Committee Doc. 002184.] Or, did the Government have another agenda, another reason to select the Paxport proposal?

The Government also agreed -- again, against the strong representations of its officials -- that it would not divert traffic away from Pearson, and it would not allow any airport facility to be developed within a 75-kilometre radius of Pearson, until the volume of passenger traffic at Pearson reached 33 million. The only circumstances in which the Government could take such action would be if it compensated the developers, or allowed it access to Area 4, a section at Pearson that had been specifically excluded from the project.

Public service memoranda warned that the "[p]robability is high that traffic diversions which would drop traffic below the 33 M threshold will be necessary," and that, "Crown's financial exposure would be high (in order of $100M NPV over 57 years of lease.)" ["Diversion Threshold/Capacity Guarantee," Committee Doc. 002008.]

Thus, the Government continued to insulate the consortium from any risk associated with the development, while cementing its monopoly hold on the southern Ontario airways. Not only would they control the whole of Pearson Airport (including potentially Area 4), but they had a powerful means to prevent any competition from other airports in the area.

Other issues of concern in the agreements related to the substantial power given the developers to commit "minor breaches" of the agreements. The only remedy given the Crown in the event of a default was to step in and take over the entire airport. This is not the usual remedy clause; large contracts like this usually provide a range of remedies, for use depending on the circumstances. And having extricated themselves from the airport business, the Government would not likely be able to step easily into the breach and return the airport to smooth operation. This fact would have given the consortium considerable leverage in the event it wanted to change certain provisions, or not live up to its full obligations.

In the event the consortium defaulted on its mortgage, and the mortgagee enforced its security by taking over the airport, the Government again was left with little in the way of recourse. It had none of the customary rights to approve a third party assignee of the lease. So that the bank or other security-holder could simply choose to install anyone -- a company with no track record, or a company with no Canadian ownership or base -- and the Government would be unable to prevent it. And the lease was for 57 years.

7. Was it proper for the Government to direct the execution of this controversial deal during the election campaign?

The evidence was absolutely clear that until October 7, 1993, when the final documents were executed, there was no contract between the parties. Indeed, negotiations continued until 24 hours before the Minister of Transport signed certain of the documents, on October 4, 1993 -- only three weeks before election day.

The Committee learned that the general rule of conduct that is observed after Parliament has been dissolved is to act with caution. One "would consider factors such as: Is it a transaction that is going to bind future governments? ... [A]re there alternatives? Are there urgencies in the matter? Is there an obligation to act? Is there controversy?" [Testimony of Jocelyne Bourgon, Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:100.]

By our constitution, the Executive of the Government is responsible to Parliament, but after the House of Commons has been dissolved, and before another has been elected, there is no Parliament to which to be responsible. As the Committee was told, this fact causes governments to act with "caution" during an election.

Should the Pearson Airport deal have been treated with "caution"? This was a major deal. It was unprecedented. It was binding for 57 years. It was highly controversial.

The argument that it could always be cancelled simply serves to remind us of the fact that when the Chrétien Government did cancel it, suits for hundreds of millions of dollars were launched, which suits now advance through the law courts while Bill C-22, which would limit any recovery to actual costs incurred, is being refused passage by the Progressive Conservative members in the Senate.

Could the making of the contract have been put off until after the election? As far as the public good was concerned, there was no urgency. From the viewpoint of the public, October was no more advantageous than November. Indeed, logic would suggest that the Progressive Conservative Government, out of respect for constitutional practice, would have put off making the contract until November if it had expected to win the election. Logic would suggest that it was the expectation that the Conservatives would lose the election that caused the Government to violate the constitutional practice, and thus to show contempt for the underlying principles of responsible government.

With regard to the violation of this practice in entering into the Pearson Airport Agreements, Professor John Wilson was clear and emphatic. [Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:45.] He did not mince his words. He characterized Prime Minister Campbell's actions as evincing "a reckless disregard for propriety," and went on: "To say that her decision was a constitutionally inappropriate exercise of power is, in my view, to put it mildly, but in the context of our customs and those of other parliamentary systems it, in my view, is also enough to justify whatever steps have to be taken to terminate the agreement." [Id., 24:15-16.]

The Committee learned that in Australia, there is a written constitutional convention known as the "caretaker convention," which expressly requires a Government "to avoid implementing major policy initiatives, making appointments of significance or entering major contracts or undertakings during the caretaker period [when Parliament has been dissolved and an election is underway] and to avoid involving departmental officers in election activities." [Submission of Professor John Wilson, read at Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:34.]

The Committee heard strong evidence that, historically, the Canadian Government has in practice observed these same principles. We believe that the Government of Canada should give serious consideration to expressly adopting this Australian convention as a convention to guide and bind the actions of a government during an election period.

Conclusion

It was apparent throughout these hearings that the Conservative majority on this Committee was focusing, almost to the exclusion of everything else, on the Nixon report. They set out to establish that the Nixon Report was less accurate or complete than it might have been. Their hope was that by doing so, they would then be able to draw the conclusion that the Pearson Airport Agreements should not have been cancelled.

The strategy of the Conservative majority on the Committee did not work. In fact, the study by the Committee has shown the reverse to be true.

The evidence brought before the Committee, as described in this Report, has demonstrated that this was a bad deal for Canada, brought about by a process that was seriously flawed from beginning to end. With or without a Nixon Report, the Prime Minister was clearly justified in cancelling the Pearson Airport Agreements, because these agreements were not in the best interests of Canadian taxpayers and the air travelling public.

The terms of the deals could not be allowed to stand. There is no justification for an agreement that gave developers not only an exorbitant rate of return, but also millions of extra dollars through sweetheart side deals, at the expense of the Government, which agreed to reduce its own revenue not just once but twice -- and that at a time when government spending was being severely reduced, and all Canadians were being asked to accept less in government support.

The Canadian public knew this deal was wrong. They spoke with great eloquence at the ballot box, particularly those Canadians living in Ontario. This inquiry has only confirmed what the electorate knew: this deal had to be cancelled, so that Pearson Airport's needs could properly be addressed, in a manner appropriate and consistent with the public interest.

<1> Several witnesses spoke eloquently of the serious problems at Pearson. However, there was no evidence of any need or desire to address those problems outside the general Government policy of using Local Airport Authorities to develop and to operate airports, until after Mr. Hession's campaign to demonstrate the pressing need was launched.

<2> Testimony of Mr. Jack Matthews, Proceedings of the Special Senate Committee on Pearson Airport Agreements, hereinafter cited as " Committee Transcript," Thursday, September 21, 1995, Issue No. 22, 22:130.

<3> Memorandum for the Prime Minister from Mr. Glen Shortliffe, Clerk of the Privy Council, dated December 4, 1992, Committee Doc. 002184.

<4> The Airport Terminals Development Group ("ATDG"), which was Paxport's competitor at that time, was a consortium controlled by the Claridge Group, a group of companies, including Claridge Properties Ltd., Claridge Holdings Inc., and others, controlled, directly or indirectly, by Charles Bronfman. For convenience, we refer to these companies in this report as we did throughout the hearings, simply as "Claridge." (At a certain point, ATDG dropped out of the picture, so that the final merger was between Paxport and the Claridge Group.)

<5> Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:63.

<6> Murray Campbell, "Pearson lobbyists had list of politicians to target: Memos indicate four firms had battle plans to gain influence," Globe & Mail, August 24, 1995, p. A6.

<7> Testimony of Mr. Ray Hession, former President of Paxport Inc., Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:83.

<8> Testimony of Mr. Glen Shortliffe, then Clerk of the Privy Council, Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:65. As will be seen, this occurred before the merger discussions began.

<9> Interoffice Memorandum from Mr. Bill Cleevely to six Treasury Board officials, dated November 26, 1992, Committee Doc. 001267.

<10> Committee Doc. 001109.

<11> Memorandum dated October 29, 1991 from Mr. Chern Heed, general manager of Pearson Airport, to Mr. Victor Barbeau, quoting comment by Price Waterhouse, Committee Doc. 000639.

<12> Letter from Mr. Don Blenkarn, Member of Parliament for Mississauga South, to the Hon. Jean Corbeil, Minister of Transport, dated March 13, 1992, Committee Doc. 000996.

<13> Letter from Ms. Carole Pitre, Chairperson, Airline Operators Committee - Terminal One Sub-Committee, to Paxport Inc. dated June 29, 1993, Committee Doc. 001088, italics in original document.

<14> Memorandum from Mr. Robert Fonberg to Mr. Michael Francino, Department of Finance, dated May 17, 1993, Committee Doc. 002072.

<15> Testimony of Mr. Glen Shortliffe, former Clerk of the Privy Council, Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:74.

<16> Memorandum from Mr. Robert Fonberg to Mr. Michael Francino, Department of Finance, dated May 17, 1993. Committee Doc. 002072.

<17> Testimony of Professor John Wilson, Committee Transcript , Monday, September 25, 1995, Issue No. 24, 24:15.

<18> Testimony of Jocelyne Bourgon, Committee Transcript, Thursday, September 14, 1995, Issue No. 19, 19:57, 59; testimony of Professor John Wilson, Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:13.

<19> Committee Transcript, Monday, September 25, 1995, Issue No. 24, 24:9.

<20> Ibid, 24:16.

<21> This was included at Tab G of the Briefing Book prepared for Committee members by the Library of Parliament research team.

<22> Mr. Hession provided a number of documents to the Committee, ending essentially in December 1992, although he acknowledged when he testified that they were by no means all the relevant documents available. When asked about documents for the period December 1992 through March 1993, Mr. Hession replied, "Senator, there are documents that would fill half this room between that period." [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:36.] Unfortunately, although the Committee requested that those documents be produced, none was provided by Paxport or the Matthews Group.

<23> As will be seen, arguably British Airports Authority was "denied a fair opportunity to compete," as the Request for Proposals was drafted to exclude foreign-controlled proponents. The Committee does not know why Mr. Bitove and Mr. Cogan decided not to pursue their threats of legal action. Mr. Jack Matthews clarified that Mr. Bitove was Mr. John Bitove Senior, who "operated and operates now...the food concessions at maybe all three terminals." Mr. Cogan was Edward Cogan, a real estate broker and developer. [Testimony of Mr. Jack Matthews, Committee Transcript, Thursday, September 21, 1995, Issue No. 22, 22:115-116.] It has recently come to light that Prime Minister Brian Mulroney intervened with active -- and, as the Court found, "extraordinary" -- steps to assist Mr. Bitove with the food concession contract at Pearson Airport, in 1989. [Canada (Attorney-General) v. Bitove, [1995] O.J. No. 2627, Court File No. B31/94A, decision of Lederman, J.] And Mr. Cogan was one of two directors of Sagegate Corporation, a company that would have benefited from $2 million contracts awarded Dr. Fred Doucet (a former senior member of the staff, and long time friend, of Mr. Mulroney), which contracts were contingent on Paxport obtaining the Pearson deal. [See: Testimony of Mr. Jack Matthews, supra, 22:122.]

<24> The Hon. Jean Corbeil, Minister of Transport, apparently was unaware of this restriction in the RFP. When he appeared before the Committee he expressed surprise that Canadian Airports did not submit a bid: "I was convinced that there were at least three bidders because Canadian Airports was in the process the whole way. They had comunicated with us on a number of occasions pressing us to request the proposal. On December 23, 1991, when I received a letter stating that they were leaving Canada because the process had taken too long and no request for proposals had yet been issued, I was virtually convinced that they would reverse their decision when we issued the RFP three months later. That did not materialize and we had two bidders. I would recall that there were four bidders on T3." Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:42-43. In fact, however, Canadian Airports may not have been able to submit a bid, because they may not have qualified under the restrictive terms of the RFP. Whether or not they would have expended the money and effort needed to put in a proposal is also unclear. During the course of Mr. Robert Nixon's review of this deal, Mr. Stephen Goudge, the lawyer who assisted Mr. Nixon, included a note to himself recording his impression after meeting interested parties: "Note: BAA thought fix was in, so did LAA." [Testimony of Stephen Goudge, Committee Transcript, Wednesday, September 27, 1995, Issue No. 26, 26:34.]

<25> The parade of different company or partnership names can be daunting. The partnership of the Claridge Group and the Matthews Group was originally named Mergeco, and was thus referred to in many documents and much of the testimony before the Committee. Eventually this name was changed to Pearson Development Corporation, or PDC. Pearson Development Corporation was to be the managing general partner for T1T2 Limited Partnership, which was the contractor with the Government for the redevelopment project.

<26> A third proposal was received, from Morrison Hershfield, but it was eliminated from consideration as it did not meet the basic requirements: Morrison Hershfield did not include the requisite $1 million deposit. Mr. Nixon met with representatives of Morrison Hershfield in the course of his review. He was told that the firm "originally responded to the request for proposals but decided not to provide the $1 million deposit required as a condition of being considered for the simple reason that the company was of the impression, under the realities of the situation, that their opportunity for success was remote." [Statement by Mr. Robert Nixon, Committee Transcript, Tuesday, September 26, Issue No. 25, 25:9.]

<27> While some people have suggested that the bankruptcy was a direct result of the cancellation of the Pearson Airport deal, this is far from clear. Representatives of the consortium pointed out frequently that there would not have been any cash flow accruing to the Matthews Group between October 1993 and February 1994. (Mr. Peter Coughlin: "[O]ver the first nine years of the lease...the partners of Pearson Development Corporation would have received no cash whatsoever." Committee Transcript, Tuesday, September 12, 1995, Issue No. 17, 17:15.)

<28> Dr. Doucet testified that half the fees from one of these contracts was to go to another firm, named "Sagegate Incorporated." He stated that, "Sagegate's principals had a key involvement in the redevelopment of the Pittsburgh International Airport and other international development projects." [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:58.] However, a corporate search revealed only a Sagegate Corporation, an Ontario company incorporated December 29, 1992 -- the precise time Dr. Doucet's contracts with Paxport began. The only principal entered on the official records of the company is a Mr. Frank Salvati, of North York, Ontario, who when telephoned by the media declined to say anything about the activities of Sagegate.

<29> Dr. Doucet maintained that these invoices related "to a contract which our firm had entered into on May 4, 1992 with two construction subsidiaries of Matthews Contracting Incorporated Limited, Coolsaet of Canada Limited and Construction Angkor Incorporated for assistance in the promotion of the national highways system." [Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:56.] But this does not explain why the invoices were made out to "Paxport Inc." -- especially considering that, as the lawyers for Paxport and Claridge repeated to the Committee many times, the partners in the T1T2 consortium were prohibited from incurring "any liability, contingent or otherwise, of a material nature that does not relate directly or indirectly" to the operation and development of the Pearson Airport terminals. [See, Submission to the Committee from Messrs. Coughlin, Vineberg and Spencer, dated September 8, 1995.] Therefore, either Paxport Inc. was engaged in activities it should not have been involved in (if indeed they were unrelated to Pearson), or Dr. Doucet's activities for which he invoiced Paxport Inc. were indeed related to Pearson Airport. He cannot have it both ways.

<30> It is significant, in considering the financeability of the proposal at this time, to bear in mind Paxport's oft- stated goal of beginning construction by the end of April, 1993. [See, eg, the Transport Canada memorandum, "Notes from meeting of December 15, 1992," Committee Doc. 000366, commenting that "Messrs Hession and Matthews noted that ... they were targeting on getting a shovel in the ground by April 30, 1993, but acknowledged this might be difficult."]

<31> And indeed, the Committee was shown Government documents that suggest the British parent company, Allders Ltd (PLC), did subsequently acquire some or all of Agra Industries' share in T1T2 Limited Partnership. See: "The Matthews Enigma," Committee Doc. 001109.

<32> Indeed, this was Claridge's original strategy as of December 7, 1992: to hope that the Government would impose sufficiently stringent financial conditions on Paxport that Paxport would fail, and the Government would turn to the next acceptable proposal, that submitted by Claridge. [See: Testimony of Mr. Harry Near, Committee Transcript, Wednesday, August 23, 1995, Issue No. 15, 15:99, and fax from Mr. Near to Mr. Glen Shortliffe dated December 7, 1992, 8:12 a.m., Committee Doc. 002218.]

<33> Mr. Broadbent was quite frank -- with the Committee and also at the time with Dr. Labelle and Mr. Shortliffe -- that he felt he had been working under unacceptable conditions, "not getting the support from the airports group that I should have been getting." [Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:98-99.] Dr. Labelle's view was rather different: after noting that the Department met those demands presented by Mr. Broadbent whenever possible, but that some were "unreasonable" [8:42], she described the events around the non-renewal of his contract as follows:

"Mr. Broadbent was hired for a term contract which was to end in mid-June.... When it became evident to me that we were likely going to be slipping beyond mid-June, I spoke to Mr. Broadbent and asked whether he would consider an extension of his contract if invited to do so. At that time, he indicated to me that he had other plans for the summer and although [he] was non-committal, [he] was not enthusiastic about pursuing this option. So that as the days went by and I was informed that there would be a new associate deputy minister coming to Transport, someone who in PCO had been following the file -- he was the senior officer looking after I think the operation side of government. Certainly our department was one that we were working through him in PCO. So he was someone who knew the file well and at that time so that in the last days Mr. Broadbent was not invited to renew his contract by myself, with the concurrence of the minister." [Committee Transcript, Tuesday, August 1, 1995, Issue No. 8, 8:44.]

<34> The testimony from all Government officials was clear that while the issue of financeability was unresolved, the parties could only "consult," they could not "negotiate." [See, eg., testimony of the Hon. Jean Corbeil, Committee Transcript, Wednesday, September 20, 1995, Issue No. 21, 21:27.] However, it would seem from a review of the Government memoranda from March through April, 1993, that Mr. Broadbent in fact was negotiating with Mergeco. For example, a memorandum prepared by Mr. Broadbent of a meeting he held with Mr. Jack Matthews and Mr. Peter Coughlin on March 23, 1993, headed "Focus on Air Canada Aspect," Committee Doc. 001555, describes essentially a negotiation session, complete with proposals and counterproposals of rents, deferrals of rents, and future negotiation workplans. Again, this raises questions about the process: clearly the Chief Negotiator was so concerned about meeting the May 31/June 1 deadline, that he was prepared to begin negotiations even before he was authorized to do so by the Government.

<35> Mr. Ray Hession, former President of Paxport, testified repeatedly that Mr. Neville had been "off the payroll" for "several months" by the time he worked on Ms. Campbell's transition team. [See: Committee Transcript, Wednesday, August 2, 1995, Issue No. 9, 9:10, also 9:14.] However it is evident from the invoices supplied by Mr. Neville that he continued to bill Paxport for lobbying services right through the relevant time that he was working (on a volunteer basis) for Ms. Campbell. [See: testimony of Mr. Neville, Committee Transcript, Thursday, August 24, 1995, Issue No. 16, 16:20.]

<36> As the Chairman, Senator Finlay MacDonald, pointed out during the hearings, this figure should more accurately be stated as 31.5 million, as the Government was allowed on a one-time-only basis to divert up to 1.5 million people. [Committee Transcript, Tuesday, August 22, 1995, Issue No. 14, 14:5.]

<37> It is evident from an internal Paxport memorandum that Mr. Hession was in close contact with Air Canada officials as the latter were preparing to submit their statement of requirements to Transport Canada for inclusion in the Request for Proposals. See: Memorandum from Mr. Ray Hession to Mr. Don Matthews and Mr. Jack Matthews, dated March 6, 1991, reporting on a telephone conversation that morning with Mr. Doug Port of Air Canada.

<38> In fact, Mr. Allan Crosbie found that the pre-tax rate of return to the developers, without including these numerous side deals, was 23.6%. This is discussed below.

<39> A corporate search revealed that Matthews Investments 4 Inc. was only formed on September 30, 1993 -- barely one week before this $3.5 million agreement was signed. Mr. Donald Matthews is listed as President/Chairperson, and a Mr. Richard J. Lachcik of Oakville, Ontario is entered as a first director. No other information could be obtained about the company -- its shareholders, its business (if any), or employees (if any).

<40> Some Conservative Committee members suggested that the Government was bound, and liable, as of August 30, 1993, the date of the Order in Council. However, it is clear that under federal statute, the Government is not bound by any contract unless it is signed by the Minister. [See, eg, the Department of Transport Act, c. T-18; the Federal Real Property Act , S.C. 1991, c. 50.] And in any event, the evidence was unrefuted that in this case, the Pearson Airport Contract was not concluded until all the documents had been signed and released from escrow, namely on October 7. [See: Letter from Mr. Rowat to Senator Finlay Macdonald, dated September 22, 1995.]

<41> Mr. Chern Heed, General Manager at Pearson Airport, warned Mr. Nixon during his study that "there were more people dealing with Pearson airport at Ottawa than there were at Pearson." It would have been impossible for Mr. Nixon to meet with everyone involved in the file. [Testimony of Mr. Robert Nixon, Committee Transcript, Tuesday, September 26, 1995, Issue No. 25, 25:36.]

<42> Just as Mr. Shortliffe attempted to downplay the import of Mr. Mulroney's interventions in the Pearson deal, so did he go to great lengths to disagree with the Court's findings in the Bitove case. The parallels -- and pattern of behaviour -- remain striking.

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