PACC Committee Report

On 31 October 1996, Canada’s civil air navigation system was transferred from Crown ownership to a private not-for-profit corporation, NAV CANADA. NAV CANADA was given a legislated monopoly in perpetuity to operate the system. In return, the Crown received a payment of $1.5 billion.

This transfer was significant in terms of the nature of the assets and amounts of money involved; this was one of the federal government’s largest divestitures. The use of a private contract as a vehicle for the transfer, the creation of a not-for-profit corporation to purchase and operate the system, and the relatively short time in which the transfer was completed, also made this commercialization unusual.

As a consequence of the nature of this transaction, and because future divestitures are likely, the Committee met with the Auditor General of Canada, Mr. L. Denis Desautels, Ms. Margaret Bloodworth, Deputy Minister, Transport Canada (the Department) and Mr. Colin Potts, Deputy Comptroller General, Treasury Board Secretariat, on 18 November 1997, to discuss this issue.

In his Report and in his opening statement to the Committee, the Auditor General concentrated on the actions taken by the Department in commercializing the air navigation system. According to his assessment, the Department had not conducted a thorough valuation of the system. Furthermore, he argued that when the Department recommended acceptance of a purchase price, it reconciled that price against an adjusted net book valuation. The Auditor General deemed this inappropriate. These observations call into question the Department’s achievement of one of two financial objectives that government set for the divestiture --- obtaining fair market value for the air navigation system.

The Department did not dispute the core arguments advanced by the Auditor General. Ms. Bloodworth, the Deputy Minister, told the Committee that "the appropriate way to value [the air navigation system] was a going concern and not net book value." She added that "in general, in principle we do agree [with the Auditor General] on that issue." (15:45) She also agreed that the documentation used to support both the net and going concern valuations of the system was incomplete. This, she explained, "was the reason why the Department did not ask its financial advisors to provide a formal valuation opinion." (15:55) Later on she stated that "in the end fair market value is what a buyer is prepared to pay." (16:05)

However, in her testimony, the Deputy Minister explained that the price obtained for the system was reasonable and a good deal for the government and taxpayers. She stated that the policy objectives established by the government for the commercialization had been attained and expressed general satisfaction with the way in which the transfer had been accomplished.

The Committee acknowledges that even with some slippage the Department fundamentally succeeded in respecting the timeframes for the transfer. It also observes that --- in the absence of evidence to the contrary --- most of the basic goals set for the divestiture appear to have been met to some degree. The Committee also wishes to affirm that on the basis of the evidence it reviewed, it is satisfied that those involved in the transfer acted with integrity. As the Auditor General stated at the end of the meeting, "we believe that people probably acted in good faith and we have no reason to think otherwise." (17:20)

Nevertheless, the Committee believes that there are several important lessons that can be learned from this divestiture. These lessons need to be applied to future exercises of this sort.

The Department has conducted a study to identify lessons learned from the commercialization and to identify key strategic issues for future divestitures. It has produced an interim report based on this study. In its Performance Report for the period ending 31 March 1996, Transport Canada also indicated that following the transfer, the Department would "develop a framework to determine whether the objectives of the transfer have been achieved." The Auditor General noted that the Department had yet to make a comprehensive report to Parliament on the results of the divestiture.

In the Committee’s view, a comprehensive report is required so that the Department can provide Parliament with a thorough assessment of the results of the divestiture. Accordingly, the Committee recommends that:

In his testimony and in his Report, the Auditor General asserted that the Department did not show due regard to economy in conducting the commercialization. He emphasized that

The Department agreed that a going concern valuation was most appropriate in terms of determining a purchase price for the system. Its own financial advisors provided a going concern valuation of $2.4 billion. The Department obtained a purchase price for the system of $1.5 billion. The Department reconciled this price through reference to an adjusted net book value for the system of $1.9 billion.

In order to demonstrate that it exercised due regard to economy in obtaining the purchase price that it did, the Department should be able to reconcile the price against what it agrees is an appropriate valuation. The Committee therefore recommends that:

From evidence produced in the Auditor General’s Report and during the meeting, the Committee discovered that documentation used in the valuation process was incomplete. It also learned that the Department’s financial advisors were not required to provide a formal valuation opinion. Although these factors resulted from conditions surrounding the transfer, the Committee believes that they must be avoided in future divestitures. The Committee therefore recommends that:

The Auditor General also raised a number of concerns regarding the manner in which the Department contracted for financial advice used in conjunction with the commercialization. In the Department’s view, the contracts were handled in a reasonable manner, given the circumstances. Mr. Colin Potts, Deputy Comptroller General, supported the Department’s overall handling of the transfer.

The Committee is concerned, however, that while the Department may not have violated any procedures set forth for contracting, certain of its actions could and should be improved. In order to ensure that, in future, all contracts are issued in a fair and appropriate manner, the Committee recommends that:

The Committee notes that in handling this divestiture, Transport Canada was engaging in an activity outside its normal sphere of operations. Such divestitures are complex and require a set of specific skills not traditionally found in most government departments. As a consequence, the Committee believes that there would be an advantage in having a third party assume responsibility for overseeing future divestitures. Therefore, the Committee recommends that:

In his Report and testimony to the Committee, the Auditor General observed that Transport Canada had yet to provide Parliament with a comprehensive report on the results of the divestiture. The Committee believes that the results of all divestitures, particularly when they involve major assets and operations of government, should routinely be reported to Parliament. Therefore, the Committee recommends that:

In closing, the Committee notes that the government decided to transfer the air navigation system to a not-for-profit organization that it created for this purpose. This organization --- NAV CANADA --- was given a legislated monopoly in perpetuity with the legal right to recover all of its costs and accumulate reserves. The Auditor General indicated in his testimony that the legislation enables NAV CANADA "to charge users for the service’s availability rather than its use."(15:35) The Committee observes that while NAV CANADA is made up of partners and is responsible for providing a service that is safe, it has no shareholders to whom it must answer. In light of these general observations, the Committee recommends that:

As the structures of government undergo change, it is likely that divestitures will continue. It is vital that the lessons learned from previous divestitures be learned and applied. It is also important that these exercises be transparent and conducted with due regard to economy.

Pursuant to Standing Order 109, the Committee requests that the Government table a comprehensive response to this Report.

A dissenting opinion from the Bloc Québécois is appended to this Report.

The Liberals have thrown away almost one billion dollars of public money by selling off cheap a monopoly in perpetuity on the air navigation system. Once again they have failed to display either strict standards or professionalism, as the Auditor General pointed out in his report of October 1997.

In addition to having literally wasted $900 million, no one in the government is willing to take responsibility for the mess, or for the decisions the new agency may make in the future. By making NAV Canada independent of the government, no member of the government -- and most definitely not the Minister of Transport -- seems willing to answer for the loss of the $900 million, and still less for NAV Canada’s decision to let 1,100 of its employees go.

The Bloc Québécois accuses the Liberals of having cheated the taxpayers of Quebec and Canada out of this $900 million, and the Minister of Transport of having washed his hands of the 1,100 employees who are losing their jobs. We hope that the government will implement the recommendations in the report of the Committee.