PACC Committee Report

Pursuant to Standing Order 108(3)(e), the Standing Committee on Public Accounts has the honour to present its

TWENTY-FIRST REPORT

The Standing Committee on Public Accounts has considered Chapter 10 of the October 2000 Report of the Auditor General of Canada (Transport Canada — Airport Transfers: National Airports System) and has agreed to report the following:

INTRODUCTION

The 26 airports in the National Airports System (NAS) are vital to Canada’s economy and collectively handle more than 90% of the country’s air passenger traffic. Between 1992 and 1999 the federal government transferred the management and operations of 22 of these airports to not-for-profit organizations (airport authorities) created specifically to run and develop them. As of November 2001, one airport remained to be transferred. The federal government retains ownership of the transferred airports and charges rent to the airport authorities who have been granted leases of 60 years with an option to renew for an additional 20 years.

Transport Canada has been overseeing the transfer and has assumed important new duties as the transfers have been completed. The Department is now the airports’ landlord and is responsible for overseeing the financial viability and integrity of the National Airports System.

Because of the importance of the National Airports System, the federal government’s ongoing responsibilities, and the large sums of money involved, the Committee decided to examine the results of an audit of the airport transfers. Accordingly, it met on 20 November 2001 to review Chapter 10 of the October 2000 Report of the Auditor General of Canada (Transport Canada — Airport Transfers: National Airports System). Mr. Michael McLaughlin (Deputy Auditor General), Mr. Shahid Minto (Assistant Auditor General) and Mr. Régent Chouinard (Director, Audit Operations) appeared on behalf of the Office of the Auditor General of Canada. Mr. Louis Ranger (Assistant
Deputy Minister), Dr. David Bell (Director General, Airport Programs and Divestiture), Mr. Hal Whiteman (Director General, Security and Emergency Preparedness), and Ms. Valérie Dufour (Director General, Air Policy) represented Transport Canada.

OBSERVATIONS AND RECOMMENDATIONS

The audit examined Transport Canada’s management of the airport transfers that took place in two rounds between 1992 and 1999. It also took a preliminary look at the Department’s performance in two new post-transfer roles: overseeing the financial viability and integrity of the National Airports System and acting as landlord of the airport facilities.

Some of the outcomes of the transfer have satisfied expectations. Most airports in the National Airports System have been expanded and upgraded, and local economies have benefited. Transport Canada’s Assistant Deputy Minister made reference to these outcomes when he asserted that the airport divestiture is “one of the most successful airport commercialization undertakings in the world.” Mr. Ranger suggested that there were many ways to measure success, one of them being to determine whether government was better off or worse off after the transfers. But he claimed this criterion was “a bit too narrow,” perhaps because a study by a consultant hired by the Department showed mixed results in this regard. Instead, Mr. Ranger said that “the measure of success for [Transport Canada] is that this new regime has attracted $5 billion from the private sector without the government having to put a penny in this.” While this is so, depending on just one criterion to measure success may be, as Mr. Ranger indicated, a bit too narrow.

According to the report, the audit found many weaknesses in the Department’s management of the airports transfer. These weaknesses may have compromised the government’s ability to achieve other important objectives such as the elimination of financial obligations on government and taxpayers to support airport operations, and the conversion of the airports into entities that are self-sustaining, competitive, and viable. At this point, these objectives have yet to be fully realized.

Although the transfer process is now all but complete, the Department has renegotiated four leases at a cost to the government of about $474 million in foregone rent ($342 million net present value). Furthermore, Transport Canada has committed to renegotiating at least three more leases (under certain conditions), and is being pressured to renegotiate others. Shortcomings in the Department’s management regime for transferred airports must be rectified before further renegotiations occur. As the former Auditor General stressed in his report, “proper systems and practices ought to be in place to complete … any future renegotiations.”

Principal difficulties involved the valuations of the airports done prior to lease negotiations, the absence of an annotated record listing the details of each transfer deal, and gaps in the information provided to decision makers and Parliament. These
shortcomings need to be resolved before any further renegotiations occur. Resolution is also required while Transport Canada is still in the early stages of its new role as landlord and overseer of the National Airports System.

The most important weakness identified by the audit was Transport Canada’s failure, in the former Auditor General’s estimation, to determine the fair market value of the assets and business opportunities it was transferring prior to the second round of transfers and renegotiating leases. The policy framework for the transfers included requirements that an airport’s value be determined on the basis of fair market value before the start of negotiations. Fair market value was to be used as a benchmark for analysis and decision making. The absence of a fair market valuation prompted Mr. Desautels to recommend that the Department periodically assess fair market value so that it could assess the appropriateness of existing leases and evaluate proposals made by airport authorities concerning lease renegotiation.

Transport Canada took a different view. In rejecting the recommendation, it claimed that it had determined “fair value” prior to the transfers but had used a different approach than the one favoured by the former Auditor General. Instead, acting on advice, the Department used “net present value of net cash flow” to determine “fair value.” Transport Canada did not use the word “market” in its explanation. Mr. Ranger testified that investment bankers advised the Department not to bother determining a market value because “those airports were not for sale.” While there were “probably about seven or eight different types of values that one could look at,” such as the criteria for success, the Department looked at only one, net present value of net cash flow, or “something that’s close to a going concern value” according to Mr. Ranger.

However, as Mr. Minto indicated, the question is “fair value compared to what. What was the benchmark? … the fair-market value would have provided at least one benchmark to compare it to.” He indicated that the Office of the Auditor General would have preferred that the Department “provide a range of values to decision makers saying, somewhere in this range of values is where the fair value is.” But instead of identifying “seven or eight different types of values,” Transport Canada chose one value and identified it as a floor position. This floor position did not represent a full range of possible values for fair return.

Now that the transfers are all but complete, many of the previous limitations on determining fair market value have been eliminated. Most of the key elements of the entity to be transferred have now been clarified, such as the non-taxable status of airport authorities and the authorities’ right to levy user fees. Valuation can now take into account the operational and financial performances of the transferred airports. For example, such things as growth potential, profitability, and the ability to raise financing and levy user fees can now be assessed. Of these, a test of “financeability” — a measure of the amount that investors would be willing to risk in a business — is a particularly good indicator of fair market value. And, as Mr. Ranger noted, the transferred airports have been able to attract $5 billion in private-sector investments. Accordingly, it should now be possible to determine approximate fair market values for airports in the National Airports System. The Committee therefore recommends:

RECOMMENDATION 1

That Transport Canada obtain fair market values for each of the airports in the National Airports System, bringing in independent expertise to assist prior to any renegotiation, and provide these values to the Treasury Board Secretariat, Treasury Board and Cabinet.

RECOMMENDATION 2

That Transport Canada refrain from renegotiating any lease untila reasonable assessment of fair market value, using a number of different evaluation methodologies including cash-flow methodology, of the airport in question has been determined.

RECOMMENDATION 3

That Transport Canada useassessed market values as the basis for any further lease renegotiations.

The Committee believes that the absence of a codified framework to document the negotiations of the transfers constitutes a major gap. Mr. Desautels reported that:

The policy framework for airport transfers is a complex one that has evolved over time. It has six components: the National Airport Policy [implemented in 1994], four sets of principles, and a number of specific government directions issued between 1990 and 1998 for either individual airports or groups of airports.

Yet despite the complexity involved and the turnover in departmental staff responsible for the negotiations, the Department did not document how the components of the policy framework were applied to individual leases. Exceptions to transfer principles were also not documented. Mr. Ranger accepted that this was a mistake, admitting that he did not think the Department “will ever have the full picture” of how the lease negotiations evolved.

An annotated record, or codified framework, would provide a corporate memory over the sixty-year lifetime of the leases and guide departmental decision making. The Auditor General recommended that the Department create such a framework and Transport Canada agreed. The Committee welcomes this agreement and believes that it is vital that the Department begin to build a codified framework immediately. The Committee therefore recommends:

RECOMMENDATION 4

That Transport Canada complete a comprehensive, codified transfer application framework immediately and apply this framework to all future lease renegotiations, and that it include reference to the implementation of this framework in future performance reports.

One of the guidelines the government expected the Department to adhere to during the transfer process was that it ensure that all airport transfers reflected the principles of equity, consistency, uniformity, and fairness, one with the other. The audit found, however, that the Department has not been able to demonstrate if and how these principles have been achieved. The audit also found that the Department is unable to show how significant differences between the leases meet the test of equity and fairness between transfer deals.

The Committee believes that it is essential that the Department be able to demonstrate that the leases it negotiates with airport authorities are equitable and fair. In particular, Transport Canada needs to do this in order to avoid challenges to the leases, claims of regional inequity, and a continuous cycle of renegotiations.

In his September 1999 Report, the Auditor General found that Public Works and Government Services had used independent fairness monitors to provide assurance that its process for issuing contracts for property management services was conducted fairly and in accordance with the rules. In its 10th Report, tabled 17 May 2000, the Committee called for the expanded involvement of these monitors, concluding that their use had avoided potential litigation and complaint. The Committee believes that this would be a useful approach for Transport Canada to adopt. It also believes that the contribution of smaller airports outside the System to the passenger flow of major airports should be factored in. The Committee therefore recommends:

RECOMMENDATION 5

That Transport Canada engage independent monitors to provide assurance to all parties that renegotiated leases and the negotiations that produce them are fair and equitable, include recognition of the value of smaller regional airports in contributing to passenger volumes of the airport in question, and meet the guidelines and principles established by the government for airport transfers.

The audit’s finding that, during the transfers, the Department provided decision makers and Parliament with information that was either incomplete, inaccurate, fragmented, or late in some instances, and no information at all in others, is of special concern. Good decisions cannot be made in the absence of information and accountability cannot be fully exercised. The Committee therefore expects that the Department will begin immediately to provide appropriate information, and recommends:

RECOMMENDATION 6

That Transport Canada develop an action plan specifically designed to improve its communication of information on airport transfers and the National Airports System to Treasury Board Secretariat and Cabinet, and submit this action plan to the Committee no later than 31 December 2002. This action plan must include implementation dates.

RECOMMENDATION 7

That following resumption of lease renegotiations and signing of renegotiated leases, Transport Canada provide, in its annual performance report, details of the new leases, indicating where they differ from the previous lease, explaining the reasons for any rental increase or decrease with reference to fair market value, showing how changes affect the government’s and the Department’s cumulative cash flow, and demonstrating how each renegotiated lease is equitable, uniform, consistent, and fair with regard to the other leases.

When the audit was completed, 4 of the 26 airports in the National Airports System (NAS) remained to be transferred. By June 2001, this number had been reduced to one and the Department expects to transfer the remaining airport shortly. As a consequence, Transport Canada’s role as overseer of the System’s financial viability and integrity, and as landlord, are now its predominant interest. The Committee was thus disappointed to discover that the same attitudes that shaped the Department’s management of the transfers have carried over to its approach to its new roles.

Transport Canada’s Director General of Airport Programs and Divestiture, Dr. David Bell, agreed with the audit’s observation that the Department had not begun to fully exercise its role as landlord. The report indicates that the Department had yet to define its role eight years into the transfer process. The former Auditor General pointed out that since 1992, Transport Canada “has adopted a predominantly hands-off approach” to its landlord responsibilities and has been “largely passive about monitoring and overseeing the NAS.” Dr. Bell’s answer that “many of the airports were newly transferred and it’s hard to start to force them to do a lot of things on day one until they learn the business” falls well short of a satisfactory explanation. The National Airports System is worth billions of dollars, is a key pillar of the Canadian economy and transportation system, and this is no longer “day one.”

A leading concern expressed by Mr. Desautels involved the fact that the Department had yet to define its role as overseer of the National Airports System and guarantor of its integrity and viability. Mr. Ranger informed the Committee that aspects of this role are soon to be clarified through legislation. On 12 June 2001, the Minister of Transport, the Hon. David Collenette, announced the government’s intention to develop a
Canada Airports Act. This Act will clarify the roles and responsibilities of the Government of Canada, as well as those of airport authorities. The Committee welcomes this decision and looks forward to expeditious presentation of the legislation.

The Committee also notes that the government intends to address several of the former Auditor General’s other concerns in this planned legislation. Mr. Ranger indicated, for example, that the Act would establish principles for charges imposed by airport authorities (such as airport improvement fees), and create parameters for non-core activities undertaken by airport authorities.

However, there are other concerns about the Department’s post-transfer role that cannot be addressed by legislative initiative. Indeed, many of these concerns relate to authorities already held by the Department, but executed poorly or not at all.

Transport Canada had not been exercising oversight of the transferred airports. It had not assessed the reasonableness of airport improvement fees (AIFs) nor had it obtained much information on how airport authorities use revenues from these fees. The Department had not systematically assessed any of the subsidiaries set up by airport authorities. It did not know the extent of the airport authorities’ business activities and had not assessed the attendant financial risks. The Department did not know if airport authorities had transferred the ownership of profitable businesses or intellectual property to off-site subsidiaries. The Department had not assessed the financial and political risks of offshore investments made by the airport authorities. The Department did not know whether airport authorities had guaranteed loans from lenders to subsidiaries.

Leases already provide the Department with unrestricted right to audit airport authorities but Transport Canada had not exercised this right with any major airport since 1995. Airport authorities are required to report on their performance every five years, but Transport Canada had not informed the authorities of its requirements and interests as landlord and overseer of the airports. As a consequence, there is no guarantee that these reports will satisfy the Department’s information needs. At the time of the audit, the Department had not carried out a comprehensive study or performed any systematic monitoring of the financial viability and health of the National Airports System as a whole. Furthermore, Transport Canada had neither defined its data needs nor begun to collect and maintain the generational databases needed to support its oversight responsibilities.

None of these actions, which are integral to the roles of landlord and overseer of the System, depend on new legislative authority. Indeed, the Department has tacitly recognized this by implementing a new lease-monitoring program in response to the audit. The real concern is that the Department has been passive and reactive in exercising its new roles instead of being active. The only sure way to resolve this is through parliamentary oversight and for that to occur, Parliament must receive more detailed performance information from the Department.

A glance at the Department’s performance report for the period ending 31 March 2001 shows that the three paragraphs on the National Airport System deal with the transfer process and provide almost no information on the Department’s new post-transfer roles. This must change. The Committee therefore recommends:

RECOMMENDATION 8

That, either beginning with its performance report for the period ending 31 March 2002, or with an annual report to Parliament focused exclusively on the National Airports System, Transport Canada provide Parliament with information on the outcomes that have been achieved through performance of its oversight and landlord roles with regard to the National Airports System. This information must include the results of the Department’s lease monitoring program, the results of all studies and/or monitoring of the financial health and viability of the National Airports System, the summary results of all audits of airport authorities, the summary results of all audits of the subsidiaries of airport authorities, the results of all analyses of airport improvement fees, and any assessments of emerging financial risks to the System.

The Committee believes that the National Airports System itself should be the subject of an independently conducted audit. This audit should resemble the special audits of Crown corporations that are conducted by the Office of the Auditor General of Canada and the results should be tabled in the House of Commons. The Committee therefore recommends:

RECOMMENDATION 9

That the airports in the National Airports System be subject to a performance audit every five years. This audit must be conducted by an independent entity, preferably the Auditor General of Canada, be similar in nature to special audits of Crown corporations and the results provided to the Minister of Transport for tabling in the House of Commons.

The Committee believes that the Department must regularly inform Parliament of the actions it has taken on the recommendations in this report and in response to the recommendations contained in Chapter 10 of the December 2001 Report of the Auditor General of Canada. The Committee accordingly recommends:

RECOMMENDATION 10

That Transport Canada inform Parliament of its plans to implement recommendations contained in the Auditor General’s Report in its annual report on plans and priorities, and of the outcomes that have been
achieved in relation to these plans in its annual performance report. This process should begin with the Departments’ performance report for 2003‑04.

CONCLUSION

In his report that was completed in the fall of 2000, Mr. Desautels asserted that the “need to address shortcomings is a pressing one,” and noted that changing conditions can affect airports financially. Subsequent events — airline mergers and a decline in passenger volume following the events of 11 September 2001 — have created significant challenges to airports in the National Airports System. The financial viability of the airports in the National Airports System is therefore of particular concern in current circumstances. As the former Auditor General pointed out

Sensitivity to economic downturns and aviation industry restructuring is a key characteristic of the National Airports System, with implications for the financial viability of a number of airports.

It is thus more important than ever that Transport Canada know what is happening with individual airports in the National Airports System and with the System as a whole.

The airports that make up the National Airports System may be managed and operated by airport authorities under Transport Canada’s oversight, but they are in fact owned by the people of Canada.

Canadians have invested billions of dollars to build and maintain the airports. They count on the National Airports System to provide them with safe, dependable, and affordable transportation and rely on it to play a key role in the nation’s economy. To ensure this, Transport Canada has been entrusted with the task of acting as the System’s overseer and landlord. The Department must act quickly and rigorously to correct deficiencies in order to demonstrate that it is worthy of the trust Parliament and Canadians have placed in it.

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

A copy of the relevant Minutes of Proceedings (Meetings Nos. 32 and 53) is tabled.

Respectfully submitted,

JOHN WILLIAMS, M.P.

Chair