BUSINESS

HARD LANDING

THE DEAL TO PRIVATIZE PEARSON AIRPORT MEETS VOCAL OPPOSITION

JOHN DALY,DEIRDRE McMURDY October 18 1993
BUSINESS

HARD LANDING

THE DEAL TO PRIVATIZE PEARSON AIRPORT MEETS VOCAL OPPOSITION

JOHN DALY,DEIRDRE McMURDY October 18 1993

HARD LANDING

THE DEAL TO PRIVATIZE PEARSON AIRPORT MEETS VOCAL OPPOSITION

BUSINESS

Although Brian Mulroney was one of the most unpopular prime ministers in Canadian history when he retired in June, he still has many rich and influential friends. Last week, Mulroney was at Montreal tycoon Paul Desmarais’s side in Beijing when Desolarais concluded a $100-million hydroelectric power deal with the Chinese government. But back home, Mulroney’s successor, Kim Campbell, was under attack over one of his government’s most controversial initiatives: a contract granting a 37year monopoly over two terminals at Toronto’s Lester B. Pearson Airport to a consortium including London, Ont., developer Donald Matthews, a former Tory party president and one of Mulroney’s strongest supporters. With the Oct. 25 federal election only weeks away, some Toronto and Ontario officials implored Campbell to delay the deal and to make the terms of the contract public—which the government pledged to do this week. Liberal Leader Jean Chrétien pounced on the issue and vowed to re-examine—and perhaps kill—the deal if elected. But Chrétien then headed off to a private $l,000-a-guest fund-raising party in Montreal attended by 200 wealthy backers, including billionaire Charles Bronfman, another partner in the Pearson deal. Campbell, however, refused to back down, and allowed lawyers and officials in Toronto to quietly sign the final agreement. Declared Campbell, who was campaigning in Charlottetown: “Mr. Chrétien would kill an infrastructure project financed by the private sector creating 14,000 new jobs.”

The signing of the deal, however, did nothing to quell the political storm. Campaigning in British Columbia, Chrétien denounced it as “indecent” and he was joined by New Democratic Party Leader Audrey McLaughlin in his demand for a review. But beyond the heated campaign rhetoric, the financial and economic implications of the deal remained difficult to assess. All sides agree that the two terminals are in need of renovations and repairs. And even before Transport Minister Jean Corbeil issued the first formal request for proposals to redevelop the terminals in March, 1992, the government argued that privatization would spare taxpayers the cost of hundreds of millions of dollars worth of improvements. Opponents, however, have denounced the deal as pure old-fashioned pork-barreling. They also question the wisdom of expanding the airport, which is one of the few profitable major airports in Canada, at a time when Canada’s airline industry

is in disarray and passenger traffic has slumped. But while Campbell and her ministers dismissed such criticism last week, their delay in making the details of the contract public before the election opened the door for Chrétien and others to make political points, drawing attention away from the economics of the project. Conceded Liberal transport critic John Manley: “There are important fundamental issues to be resolved, despite the deal’s political odor.”

Although the precise terms of the deal remained shrouded in secrecy at the time it was signed, the government disclosed the main provisions of the contract on August 30. Pearson Development Corp. (PDC) is a consortium 66 per cent owned by a division of the Bronfman’s Claridge Group and 34 per cent owned by Paxport Inc., which is controlled by Matthews. Initially, Claridge bid against Paxport for the contract. Paxport prevailed in August of 1992, but the two groups joined forces last January and Claridge eventually approached Matthews and took a majority interest in the consortium. PDC now

holds a 37-year lease on the terminals, with an option to renew it for an additional 20 years. The Claridge Group already controls Pearson’s Terminal 3, which was built by private developers in 1989. Said PDC chairman and president of Claridge Investments Peter Coughlin: “We’re proud of this deal.”

Under the agreement, the companies will be required to pay Ottawa only a percentage of gross revenues or a fixed amount— whichever is higher. The federal government currently receives $23.6 million a year from the two terminals, which generate a net revenue of about $60 million annually. In fact, Pearson is one of the few consistently profitable Canadian airports. In the first year of the new lease, Ottawa will be paid $28 million, although it is actually deferring rent of $33 million over years 2 through 4 of the arrangement to ensure that construction starts immediately. According to PDC spokesman Tom Reid, construction is slated to start by December. The consortium claims that the construction will create 14,000 “person-years” of employment—the source of the 14,000-job figure cited by an agitated Campbell.

At first, the opposition to the Aug. 30 announcement about Pearson was relatively subdued and there seemed to be limited resistance to Ottawa’s 1987 policy of privatizing airports. But leaked cabinet documents published by The Ottawa Citizen on Sept. 25 indicated that Transport Canada officials had major concerns including questions about Paxport’s finances and its ability to fulfil its construction commitments. That report gave Chrétien, Ontario Premier Bob Rae and local Toronto politicians ammunition for their political attacks on Campbell. At a special meeting of Metropolitan Toronto’s municipal council, councillors passed a motion condemning the deal—but stopped short of asking for a legal injunction. The city’s lawyers said that the development consortium could then sue the city for huge damages if a court granted the injunction, but later dismissed the city’s case. Some councillors, who led a picket at the airport the day of the meeting, argued that Ottawa should have granted the lease to a Local Airport Authority, a nonpartisan authority made up of local government officials and businessmen. The other privatized airports in Canada are all under the control of such bodies.

Concerns about PDC’s promises were also heightened when the privately owned Matthews Group acknowledged last week that it has undergone a financial restructuring with the co-operation of the Royal Bank of Canada and the management consulting firm Ernst & Young. Paxport spokesman Tom Reid conceded that, like other real estäte and development companies, the Matthews Group has been under some financial strain. But he argued that all significant concerns have been addressed in Transport Canada’s review process. ‘They really dragged this thing out,” Reid said. “Not only was it frustrating, it was costing about a million dollars a month to sit around the table.” Reid added: “The contract was supposed to be signed in June. It was already delayed and the timing now has nothing to do with the election.”

Whatever financial reasons there were for pushing the deal forward, the pending election and the involvement of several of Mulroney’s friends and former associates reinforced the public impression that the deal was politically driven. The cast of characters includes: Bill Neville, a lobbyist and former head of Mulroney’s 1984 transition team; Fred Doucet, a lobbyist and Mulroney’s former chief of staff; Ray Hession, a former federal deputy minister of industry, science and technology; and Otto Jelinek, former federal revenue minister and recently appointed president of Matthews’ Asian subsidiary. The Liberal party, however, is also well represented. Charles Bronfman, whose family owns Claridge, is a longtime supporter and his top adviser is Liberal-appointed senator Leo Kolber.

Industry experts question the need for renovated facilities at Pearson. David Glastonbury, president of Transport 2000, an Ottawa-based consumer advocacy group, noted that the ongoing federal-provincial study of high-speed trains between Quebec City and Windsor would also diminish the domestic demand for new capacity at Pearson. “Air traffic is down and there is no sign that it’s about to pick up,” Glastonbury says. ‘We have a real problem with the supposition that Pearson must be overhauled.” According to federal government estimates, traffic through Pearson is expected to increase by about three per cent a year.

Ottawa is privatizing airports based on the theory that private-sector owners will operate them more effectively than government bureaucrats. But Andrew Roman, a Toronto lawyer who has written extensively on airline deregulation, says that unless there are specific provisions in the contract dealing with revenues, PDC may simply use its monopoly to raise fees and charges to airport users if it does not meet its profit targets, rather than cutting costs. Said Roman: “It may become privately owned inefficiency, as opposed to publicly owned inefficiency.”

Indeed, following the signing of the contract last week, Coughlin admitted that costs at Pearson would increase under private management. Although there has been some concern about a dramatic jump in charges, Coughlin said that costs at Terminals 1 and 2 would be brought into line with those at Terminal 3. Ottawa bills the airlines about $3 a passenger for use of Terminals 1 and 2. At Terminal 3, however, Claridge charges about $7 a passenger. Coughlin said that that compares to rates charged at other North American airports. “No matter who owns it, the airline fees have to go up,” he noted.

Despite the threats from opposition leaders, there is no assurance that the transaction can be overturned. The Liberal’s Manley admitted last week that the party would have to obtain legal advice and introduce new legislation before rescinding the contract. Despite the unwavering stance of the Tory government and PDC officials, they failed to quell the political turbulence surrounding the deal. And with two weeks still remaining in the federal election campaign, that turbulence was bound to continue.

JOHN DALY

DEIRDRE McMURDY