PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 20, 2001

• 1543

[English]

The Vice-Chair (Ms. Beth Phinney (Hamilton Mountain, Lib.)): I think we'll start the meeting. It's the 32nd meeting of the Standing Committee on Public Accounts.

Today we have two sets of witnesses. From Transport Canada we have Louis Ranger—and maybe you could introduce the two people with you. He is the Assistant Deputy Minister for Transport. And from the Office of the Auditor General of Canada we have Michael McLaughlin—and maybe you could introduce the two people with you.

The Vice-Chair: We're doing chapter 10 today, so we'll start with the Auditor General.

Mr. McLaughlin.

[Translation]

Mr. Michael McLaughlin (Deputy Auditor General, Office of the Auditor General of Canada): Madam Chair, thank you for this opportunity to appear before this committee to discuss our October 200 chapter on National Airports System airport transfers. With me today are Mr. Shahid Minto and Mr. Régent Chouinard, respectively the Assistant Auditor General and Director responsible for the audit.

• 1545

Chapter 10 focuses on Transport Canada's handling of the transfers of Canada's largest and busiest airports between 1992 and 1999, the department's oversight of the National Airports System as a whole, and its performance as landlord of airport facilities.

Our audit concentrated on the financial and oversight aspects of the transfers, not on security and safety. Transport Canada's mandate to regulate the safety and security of air transportation has not changed with the transfers. The department must still ensure that the transferred airports operate in a safe and secure manner.

With the transfers of airports to airport authorities, Transport Canada has assumed a new role and gained some new responsibilities. It is responsible for guaranteeing the continued integrity and viability of the National Airports System. In addition, as landlord of the transferred facilities, it is responsible for ensuring that the airport authorities operate within the terms of the lease agreement and their by-laws.

[English]

Mr. Chairman, in relation to Transport Canada's new responsibilities, we found that eight years into the transfer process the department had yet to define its role as the overseer of the national airport system and guarantor of its integrity and viability. In 1997 it started a mandatory five-year review designed to determine the financial impact of the transfers and recommend an appropriate policy framework. In October 2000 the review exercise, which had cost over $2 million and was to have been completed in June 1998, had not been finalized. This is particularly troublesome because there are several emerging public policy issues on which the department had not developed a position.

For example, airport improvement fees have become an increasingly important source of revenue for airport authorities. Our chapter notes that in its five-year review the department found that there is little information on how airport authorities use revenues from airport improvement fees. Some airport authorities have yet to conduct any costing studies to assess whether their rates are reasonable and comply with the provisions of the lease and bylaws.

Some airport authorities have created subsidiaries whose activities include airport management and operational services, airport marketing and consulting services, and business ventures, such as investments in airports in eastern Europe, South America, and the South Pacific. We are concerned that the department knew little about the activities of these subsidiaries and had yet to assess the financial risk to the airport authorities and to the public purse.

In addition, the department has been passive in monitoring sole-source contracting by the airport authorities. The committee may wish to inquire how Transport Canada has improved its monitoring of airport improvement fees, subsidiaries, and sole-source contracting.

Mr. Chairman, we found that Transport Canada's oversight of the financial viability of the airports lacked rigour and was reactive in nature. This is even more critical today, given the recent drop in the number of passengers and the significant construction projects under way at many of the transferred airports.

In addition, we noted that Transport Canada had provided rent credits to subsidize capital works at airports and negotiated other forgiveness of rent. The net effect has been to permanently reduce current and future revenues for the crown. This information had not been reported to Parliament in a complete and transparent manner. The committee may wish to obtain from Transport Canada some assurances that it is now handling issues of importance appropriately.

Another issue we would like to deal with concerns the management of the transfers. We concluded that the department's approach to the analysis of the worth of the business it was transferring was so seriously flawed that the resulting information provided to decision-makers was neither reliable nor complete. Transport Canada has not been able to demonstrate how the transfer agreements and subsequent renegotiations were equitable, uniform, consistent, and fair, as required by government directions. While we recognize that many of the players involved in the negotiations have since left the department, and there are few airports left to transfer out, we think the committee may want to inquire how the department will ensure that the analysis in future devolutions is done with due diligence and that information provided to decision-makers is complete and reliable.

Mr. Chairman, that concludes our opening statement. We'd be pleased to respond to questions from the committee.

• 1550

The Chair (Mr. John Williams (St. Albert, Canadian Alliance): Thank you very much, Mr. McLaughlin.

Now we'll turn to Mr. Ranger for an opening statement by Transport Canada.

Mr. Louis Ranger (Assistant Deputy Minister, Transport Canada): Thank you, Mr. Chairman.

Thank you for the opportunity to appear before this committee. We're very pleased to be here today to discuss the findings of the AG's report on airport transfers. With me today are Dr. David Bell, director general of airport programs and divestiture, and Valérie Dufour, who is director general of our air policy branch.

Mr. Chairman, I would like first to outline some of the main changes we have made since the Auditor General tabled his audit report in Parliament in October 2000. Then I'd like to provide you with information on measures the government has taken or is taking to continue the implementation of the national airports policy.

The success of this government's airport divestiture is undisputed. We recognize with hindsight that a number of things could have been achieved more effectively, but I believe it's fair to say the divestiture of airports that form part of our national airport system is an initiative that has resulted in improved airport facilities, more businesslike airport operations, and closer ties to local economic development initiatives, while maintaining safety of operations. In fact, Canada's airport divestiture initiative is one of the most successful airport commercialization undertakings in the world, and every year we have people from a number of countries coming to visit us and asking how we have achieved success so quickly.

[Translation]

With more than $5 billion invested in airport capital projects to date, airport authorities have expanded rapidly, providing an improved level of service to the travelling public and generating significant economic activity in many regions.

The Auditor General's report provided useful guidance on whether Transport Canada had to focus its efforts to further protect the public interest. Many of the Auditor General's comments were timely and were taken into consideration by the government as it clarified its role with the NAS airports.

Transport Canada's officials have carried out or begun work on all of the measures that it had committed to in the department's original responses to the Auditor General's recommendations.

[English]

I would now like to highlight some of the main initiatives the department has undertaken since the report was tabled, and there are really three blocks of initiatives that I would like to summarize this afternoon.

First, the result of the local airport authority lease review, the LAA lease review, carried out between 1997 and 2000, confirmed the overall success of the 1987 airport divestiture policy. It identified, however, a need to clarify the roles and expectations of the airport authorities and those of the Government of Canada in this post-divestiture period. As a result of this review, and again in line with the OAG's recommendations, the department has implemented a more rigorous lease monitoring program, a program that will, where appropriate, include an assessment of airport authorities' practices. It has also developed lease review schedules to ensure a consistent national treatment of the leases, while taking into account the specific terms and conditions of each lease. Finally, the department has established a national program to develop and transfer critical knowledge and skills to all staff responsible for lease management and lease monitoring. This is a major issue the AG identified. This is what I call the first block of initiatives.

Moving now to the second block, on June 12, 2001, our minister, the Honourable David Collenette, announced the Government of Canada's intention to develop a Canada Airports Act. This legislation will build on the success of the national airports policy, while addressing many of the Auditor General's recommendations, as well as other issues that have arisen since that policy was announced in 1994.

The legislation will address key policy issues, such as, first, clarifying the roles and responsibilities of the Government of Canada, as well as those of airport authorities; second, updating and strengthening the governance regime of airport authorities; third, establishing requirements for transparency and consultations between airport authorities and interested parties; fourth, establishing principles for charges imposed by airport authorities, including special provisions for airport improvement fees, again an issue raised by the AG; fifth, addressing competition issues, including equitable access for airlines to airport facilities and take-off and landing slots at airports; sixth, ensuring that any airport activities are consistent with Canada's international obligations, including trade; seventh, establishing parameters for non-core activities undertaken by airport authorities; and eighth, establishing appropriate enforcement mechanisms.

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[Translation]

Our minister also announced his intention to undertake a review of the current rent policy for leased airports in the National Airports System. This review is in response to the demands by the airport and aviation communities and the Auditor General's recommendations. This policy review will ensure that the Government of Canada's airport rent policy balances the interests of all stakeholders, including the air industry and the Canadian taxpayers.

It is important for the Government of Canada to protect the investment of the Canadian taxpayers, to receive fair value for these national assets and airport businesses, and to ensure that the interest of consumers are taken into account by airport authorities. Extensive consultations are being undertaken with stakeholders on both legislation and the rent policy review.

[English]

In closing, I would like to acknowledge the value of the OAG's chapter 10. It makes an important and timely contribution to our efforts, to the successful implementation of the national airports policy.

At this stage, we would be pleased to answer any questions. Thank you.

The Chair: Thank you, Mr. Ranger.

[Translation]

Mr. Perron, the floor is yours.

Mr. Gilles-A. Perron (Rivière-des-Mille-Îles, BQ): Thank you, Mr. Chairman. Welcome, gentlemen. Thank you for coming today.

If memory serves me right—and we are going back a bit here—26 Canadian airports were slated to be transferred to local, regional or national level organizations. According to the latest information that I have, 25 of the 26 airports have been transferred. Which airport has yet to be transferred?

Mr. Louis Ranger: Prince George, British Columbia.

Mr. Gilles-A. Perron: Why has this airport not yet been transferred?

Mr. Louis Ranger: We are working on that. We hope that the transfer will take place before summer 2002.

Mr. Gilles-A. Perron: Perhaps it would be a good idea to put a stop to the process, because if it works like the airports at present—

I have been quite involved in the transfers, as the Member for Rivière-des-Mille-Îles. We are in the Mirabel-Dorval region. With ADM, I have seen everything, and more. The first question I would like to ask is this: Have you solved the problem with the contracts that the airports under the local airport authority could issue to friends without using the bidding process? Has that problem been resolved?

Mr. Louis Ranger: As you are undoubtedly aware, standard procedure is that there must be transparency for all contracts over $75,000. That means the airport is required to make public the list of all contracts over $75,000, and it must be accountable. As you know, each year the airport must hold a public meeting and be accountable. That is the current mechanism.

Earlier on, I talked about more transparency in airport management. We are working on a host of measures to make decisions involving airport management even more transparent.

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Mr. Gilles-A. Perron: There are no problems with bilingualism. We know, however, that the Local Airport Authorities are not required to call for tenders. So they can have a sole source supplier, regardless of the size of the order, whereas the Canadian Airport Authorities are required to go to tender for all orders over $75,000.

If I remember correctly, Dorval and Mirabel were classified as Local Airport Authorities at the time. However, we all recall that in Toronto, there were million-dollar contracts issued without any invitation to tender. So I hope that your act will finally solve this problem with sole source suppliers.

Mr. Louis Ranger: Clearly, one of the main objectives of the bill is to try and standardize transparency and governance principles for all 26 airports. That is clear. From now on, these principles will be in the act instead of being set out in the contracts between the government and the airport authorities.

That will give a lot more weight to these requirements. If there is any deviation, it will be with respect to what is stipulated in the act. So it will be an offence under the act instead of a hitch in a contract between the government and an airport authority. So it will give substantially more weight to the standards regarding transparency that we are going to establish.

Mr. Gilles-A. Perron: The Auditor General's Report states that the department has still not defined your role in monitoring the National Airport System. Has your role been defined now? If yes, what is your definition of the role?

Mr. Louis Ranger: It is clear that we have had a role since the beginning. It is contained in the bill on the airports. We have an oversight role. My colleague David Bell could tell you about the measures that we have strengthened to monitor what is happening in our airports more closely. We are very much aware of what is happening in each airport. Many people are concerned, for example, with the consequences of the events of September 11 for our airports.

I think it is accurate to say that our airports were in a better position than some airline companies to deal with these exceptional circumstances. Our airports, generally speaking, are doing well.

Mr. Gilles-A. Perron: I am not concerned with September 11; I am concerned with the situation that existed prior to September 11.

Mr. Louis Ranger: Fine. Perhaps David Bell could tell you about our role in following up on what happened.

[English]

Mr. David Bell (Director General, Airport Programs and Divestiture, Transport Canada): Thank you, Louis.

The question is about the role and the Auditor General's comment about it. Prior to airport transfer, of course, we had the role of owner, operator, funder, regulator, policy-maker—we had all those roles. With the advent of transferring, we lost the operator role. We transferred the operations, but we maintained the safety and security role, we maintained the policy-making role. The new roles we took on, which the Auditor General referred to, were those of a landlord. So we had a contract, we had a lease, and in that situation there are a number of responsibilities that both parties have. And I think the Auditor General was referring to the fact that we had not started to fully exercise some of those roles. I think that was a fair statement. Many of the airports were newly transferred, and it's hard to start to force them to do a lot of things until they learn the business.

But since then we've done a number of things. We have developed a lease monitoring process, where we now annually go and monitor the airport people, go on-site and conduct a documentation review, to write a report on how they are doing against the lease, their responsibilities and obligations from a system point of view. We gather information on a quarterly basis, their financial statements, and do analysis of those to see how they're doing from a financial point of view. We do an analysis of all the annual reports to have a sense of how we're doing.

So I think those were some of the roles the Auditor General was referring to, and those are some of the steps we've taken to try to deal with that issue. And there was also an obligation placed on each of the airports when they were transferred for a five-year review. At the end of five years they must pause and do an independent review and make it public. So that's another piece of the system that allows us to see what's going on out there, to take on that role of system monitor, as well as good landlord.

[Translation]

Mr. Gilles-A. Perron: [Editor's Note: Inaudible] personally that you did not work hard enough in the past to conduct an in-depth audit. You undoubtedly know that these airport management organizations set up other profit-making companies that receive financial assistance from ADM, to name just one, and that if the company set up by ADM went bankrupt, it was us, as taxpayers, who were responsible for the company's debt, and not ADM.

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[English]

Mr. David Bell: Mr. Chair, we didn't become responsible for those debts. What happened is that some airport authorities set up subsidiaries, for-profit subsidiaries, and the federal government didn't become responsible for those subsidiaries. The concern being expressed at the time was, what if one of those subsidiaries then got into trouble and went to the parent? And in most of the cases the parent had set up structures such that this would not happen. And in our legislation that's just going on now we're going to try to strengthen that, so that if there were a subsidiary created, there would not be a fallback to the parent.

[Translation]

Mr. Gilles-A. Perron: Mr. Ranger can add to your answer.

Mr. Louis Ranger: The real answer is that when this policy was designed, we foresaw all of these possibilities. Of course, we had foreseen that that could happen. I think that it is accurate to say today that we did not think that it would become as widespread as it did in certain airports, not all airports.

A few years ago, I went to visit the Frankfurt airport. The bulk of the airport's activities takes place outside Germany. They invest throughout the world. That trip enabled me to understand just how far this could go. The bill that we are currently working on will contain a chapter on non-core activities. I think that we are going to have a good debate on how we should differentiate between activities that are essential for operating an airport and the other activities that could be attractive, and require a different system. We do not want to ban them, but have a different and competitive system for non-core activities.

The Chair: Thank you, Mr. Perron.

Mr. Bertrand, please, you have eight minutes.

Mr. Robert Bertrand (Pontiac—Gatineau—Labelle, Lib.): Thank you very much, Mr. Chairman.

Mr. Ranger, what is the term of the leases that are signed between your department and the non-profit organizations that manage the airports?

Mr. Louis Ranger: They are 60-year leases, renewable for 20 years.

Mr. Robert Bertrand: You also mentioned that there was a system in the new act under which this provision would be reviewed every five years.

Mr. Louis Ranger: The Auditor General had indicated that there were some inconsistencies from one airport to another. We challenged that conclusion, but in the public perception and in airport management, there was the whole debate around the opportunity for the government to review the levels of the leases. Some airports feel they are being charged too much. In the end, after having gone to Cabinet, the government decided to examine the rents. No commitment was made to reduce or increase them. A commitment was made to review the method used to establish the rent.

Since these are 60-year leases, I do not need to point out that we will take as much time as we need, because regardless of the change, if we carry it over a 60-year period, it will make a huge difference in the department's revenues.

We are in the midst of that. We have committed to consulting the airports again and looking at whether it is necessary to change or harmonize rent across the network.

Mr. Robert Bertrand: I have a question about protection. Who is responsible for firefighting? Is it the airport or your department?

Mr. Louis Ranger: I am going to ask David Bell to correct me if I am wrong, but generally speaking, the entire issue of insurance coverage... The airports belong to us. The government chose, in signing contracts with each of the airports, to require that they obtain insurance coverage in amounts that are clearly set out. So the airport pays the insurance premium and provides us with a guarantee that the insurance has been—

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Mr. Robert Bertrand: Maybe my question was unclear. Are the employees who are on site, and who do the firefighting, employees of your department or are they employed by the non-profit organization?

[English]

Mr. David Bell: The firefighting is done by airport employees, that is firefighting for an aircraft. They used to be Transport employees, they've now been transferred to airport. If you're talking about a fire in a building, it would be either the fire hall or the airport authority employees augmented very quickly by arrangement with the municipal firefighting agencies.

[Translation]

Mr. Robert Bertrand: Do the ones who respond when a fire breaks out on an airplane have to comply with national standards?

Mr. David Bell: Yes.

[English]

Mr. David Bell: There's a civil aviation standard for all airports. With firefighters there's a training standard, there's a response standard, all those things. They all have to meet that standard, that's part of getting their operating certificate each year. So it's the airport authority that does that.

[Translation]

Mr. Robert Bertrand: Mr. Chairman, I must say that this idea of for-profit subsidiaries bothers me a bit.

Mr. Gilles-A. Perron: We are in the same boat.

Mr. Robert Bertrand: I did not think that a not-for-profit organization could do such things. You mentioned that 25 out of 26 airports were transferred. Do we know how many of these for-profit subsidiaries were established?

Mr. Louis Ranger: To my knowledge, there are two for sure. There may be more. There is Vancouver, which is by far the pioneer in this field. A number of subsidiaries were established there which, to my knowledge, have been very prosperous.

In Montreal, there is ADM [Montreal airports] which, on a much smaller scale, also tried to break into the international market.

[English]

Mr. David Bell: Winnipeg.

The Chair: Your friend Mr. Minto would like to say something, I believe.

Mr. Shahid Minto (Assistant Auditor General, Office of the Auditor General of Canada): Mr. Chairman, I was just going to provide the number. At the time we did the audit there were 13 subsidiaries.

The Chair: And how many airports were actually participating in that?

Mr. Shahid Minto: I think the number mentioned by Mr. Ranger. I think there were three of them at that time.

A Voice: Plus Calgary.

Mr. Shahid Minto: Four.

Ms. Valérie Dufour (Director General, Air Policy, Transport Canada): I think it's also fair to say that most of those, other than Vancouver, have been withdrawn. ADM has, in fact, in it's restructuring and redressement, withdrawn most of those.

The Chair: Monsieur Bertrand.

[Translation]

Mr. Robert Bertrand: Mr. Ranger, you mentioned that the Government of Canada would probably not be liable for a deficit or any debts incurred by these subsidiaries. I can tell you that I am not so sure about that.

I would like you to further develop the answer you gave Mr. Perron earlier, because if these airport authorities are created by government, I think that if they incur debts, we will probably be responsible for them.

[English]

Mr. David Bell: We have a long-term lease, and we maintain the ownership. We do not take the financial liability of the airports. So if an airport fails, we take it over.

The Chair: Mr. Minto, you have something to say on this?

Mr. Shahid Minto: Mr. Chairman, I'd just like to draw the attention of the committee to paragraph 123 of the report. Here we talk about other risks. At the time of our audit Transport Canada did not know whether the authorities had guaranteed loans from other lenders to subsidiaries. Later you'll find that we said:

The Department recently obtained limited and unaudited financial information on subsidiaries.

They indicated that the subsidiaries had received about $17 million in interest-free loans from parent corporations. So I think it was a lack of total information, but they had received $17 million of loans.

If I can just stay for a minute with this theme, if you look at paragraph 121, you will see that we were also concerned that some of the profitable enterprises had been moved off site, and of course, that effects the rent quite substantially, because the rent is based on all the revenue generated on site.

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I am not aware of what has happened since we did the audit, and I listened to Mr. Ranger very carefully today, but our concern at that time was that the department did not know enough about this. Some of these subsidiaries were in eastern Europe, some in South America, and they weren't aware of the political risks and the financial risks at that time.

So on the subject of loans, yes, at that time they had received about $17 million worth of interest-free loans from the parents.

[Translation]

The Chair: Mr. Bertrand, please.

Mr. Robert Bertrand: I have a question, Mr. Ranger. I understand from what you said earlier that the government would not be responsible. But what would happen, for example, if an airport could not pay its rent, specifically because one of its for-profit subsidiaries was not making enough money? What would happen?

Mr. Louis Ranger: I don't want to dodge your question, but when we announced our intention to introduce new legislation, we said clearly that this specific issue should be included in the new bill. We are not starting at square one in our efforts to develop a new model to deal with non-essential airport activities. Not long ago, we introduced legislation to establish port authorities. We had exactly the same problem in the case of the ports: they could establish subsidiaries. But we laid down some very strict standards as to how much the port could invest in a subsidiary, and we stated very clearly that the subsidiary could not be an agent of the Crown. In the future, there are all sorts of ways of limiting the government's liability.

As for the past, the only assurance I can give you today is that there has been a reduction in non-core activities. To my knowledge, Montreal has no such activities and Vancouver has reduced as well.

For the future, in part as a result of the Auditor General's comments, we are taking steps to correct this problem. But you are not the only people who have expressed concerns and I said earlier that we had not anticipated the potential scope of the problem.

The Chair: Thank you very much, Mr. Bertrand.

[English]

Mr. Murphy.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Mr. Chairman. I just have a couple of questions for Mr. Ranger, and perhaps Mr. Bell also.

I want to explore this whole issue of being better off or worse off, the Canadian taxpayer that is, and also the comments on some of the individual airports.

First, you've indicated that from a general point of view, $300 million less has been paid. Is that on annual basis?

Mr. David Bell: That's annually, yes.

Mr. Shawn Murphy: And how much right now does the Government of Canada spend on airports?

Mr. David Bell: We would spend, if you put them all in right now, probably—and it's tough to say because we have—

Mr. Shawn Murphy: Approximately.

Mr. David Bell: Approximately, $50 to $70 million.

Mr. Shawn Murphy: And is that expected to decrease?

Mr. David Bell: Yes.

Mr. Shawn Murphy: I understand you're making profits from Pearson, right?

Mr. David Bell: No.

Mr. Shawn Murphy: You're not making profits yet?

Mr. David Bell: I'm just saying how much we spend. You're also asking the question as to whether we also take in rent revenue?

Mr. Shawn Murphy: Yes.

Mr. David Bell: If you add that in, we're doing a little better than breaking even.

Mr. Shawn Murphy: And as time goes on, your rent will go up and your expenditures go down.

Mr. David Bell: Yes, we hope so, as we divest more airports and finish the program off.

Mr. Shawn Murphy: I thought you were taking in a lot of money from Pearson in rent. You're not?

Mr. David Bell: We are, yes. We're taking in over $200 million in total from the eight airports that pay rent annually.

Mr. Shawn Murphy: I'm still not clear on that. You indicate your expenditures are around $60 million, but you're taking in around $200 million in rent. So that means you're making about $140 million.

Mr. David Bell: There is also one other expenditure. We have a small airports capital program worth $5 million.

Mr. Shawn Murphy: I'm aware of that.

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Mr. David Bell: So yes, we are taking in more than we are spending at this point in the airports program alone.

Mr. Shawn Murphy: And 10 years ago you were probably spending about half a billion.

Mr. David Bell: Yes.

Mr. Shawn Murphy: So it might have been a pass-off or downloading, but there's been a substantial saving to the Canadian taxpayer.

Mr. David Bell: Yes, the crown has certainly made a substantial saving on an annual basis.

Mr. Shawn Murphy: And there's one other area I want to explore, and maybe the Auditor General's department will comment on it, because I'm not clear on this. There were four studies done on four individual airports: one was better off, one was neutral, one was worse off, and one was significantly worse off. What factors would go into the equation to determine “better off”? It seems to me the airports operate better, they're more efficient, the people that run them now are in tune with the local economy in which the airport is situated. As Mr. Bell knows, I was very involved with one of the smaller airports. I'm not familiar with the workings of the larger ones, Pearson or Vancouver. Can you elaborate on how these airports are worse off and significantly worse off? It seems to me, on the outside looking in, we're much better off at all airports than before divestiture.

And also too, everywhere you go, there are major capital expenditures being undertaken. Are these expenditures that would have been undertaken by the Canadian taxpayer if it weren't for the divestiture program?

Mr. Michael McLaughlin: Perhaps I can just start on this, and then I'll pass it to Mr. Minto to comment more fully.

At the time of the transfer of the airports, the airports would have a certain asset value. So there should have been a determination of what that value was, and we would have said that was Transport Canada's responsibility. So they would then attract a certain amount of rent based on what it was they were transferring to the private sector or to these local authorities. So the Government of Canada had already invested quite a bit of money in these airports. One of the reasons, from a policy point of view, they wanted to transfer the airports was to get outside the debate as to how much money should be spent on airports, and allow the local authorities to make some decisions Transport Canada felt they couldn't make or would get caught up in.

Mr. Shawn Murphy: But the basic value of the assets is the amount of money the airports were making before divestiture. If you accept Mr. Bell's testimony, we were losing half a billion dollars, so that would tell me there was no value. Am I wrong?

Mr. Shahid Minto: With due respect, sir, I am not sure Mr. Bell said we were losing half a billion dollars. He said we had expenditures of half a billion dollars.

Mr. Shawn Murphy: Expenditures, well—

Mr Shahid Minto: The difference now is that, for example, all the revenue they generate at the airports is kept at the airports. Previously, all the revenue that was generated went to the CRF, and it was used to cross-subsidize other airports in the system. Now you don't use any of that to cross-subsidize all the other things, so I am not sure we are looking at two comparable entities. When the public servants were running the airports—and I'm not advocating they do it again—they were doing it under different rules. They were not allowed to make the decisions the airport authorities are being allowed to make. For example, if you look at the expansion in Toronto that's going on, this would have required an appropriation and going through the estimates process, and then political realities would have taken over, and you don't know if you would have got the money.

Are they better off, are they worse off? Obviously, we were in a boom time, the number of passengers went up, the revenue went up. The airport improvement fee is something the government never charged, but each airport can charge and supplement its revenue from the airport improvement fees. I just bring you back to paragraph 74 of our report, where we wanted to ask whether the department had done a study to see if they are better off or worse off. It says:

We found that Transport Canada had yet to determine and update with each transfer how airport transfers have cumulatively affected the government's fiscal framework. Nor has it updated its estimate of how the airport divestitures have affected its own budget...on a cumulative basis since 1996.

They had not done that study, but in principle, today, if you ask us, I would say, yes, there is service, yes, there are facilities.

• 1625

Mr. Shawn Murphy: I fail to see how the Auditor General can make the statement that with two airports you studied, one was worse off and one was significantly worse off.

Mr. Michael McLaughlin: If I can answer, we did not do that study. That was a study that was commissioned by the department. We looked at that study, and that was the department's conclusion as to where they stood as a result of these divestitures. Unfortunately, we could not get access to all the information gathered for that study, as we reported in paragraph 80, because of the way the study was done and the confidentiality between the airport authority and the contractor and the department, so we couldn't confirm the study.

Mr. Shawn Murphy: That's my point. I don't know how, when you look at everything going on, the capital that would have to be spent by the Canadian taxpayer, a statement could be made that we're significantly worse off. That tells me we're running a more inefficient operation, or there's somebody making a profit, or there's some other form of hanky-panky going on in the system, which I don't think is the case. I just don't know how the statement can be made that an airport is significantly worse off after the divestiture.

The Chair: We may have attempts to explain that, one from Mr. Minto, and I presume Mr. Ranger will have something to say on this too.

Mr. Shahid Minto: In paragraph 79 we say that in 1999 a consultant was hired by the department and completed an after-the-fact analysis of the government's financial position with individual transfers at four local airports. Mr. McLaughlin has brought to your attention the fact that there were access problems with the documents. Then in paragraph 81 we say:

We therefore are unable to verify and provide any assurance on the results of the analysis.

That said, the analysis found that over the first five years after the transfers “the government was better off at one airport, marginally worse off at another airport, and neutral with respect to a third”, etc.

This is not our finding. We are just supporting the finding of a consultant hired by the department to do the study. If you ask me how we got to the conclusion, my problem is that the arrangement made between the department and consultant was such that the department had no documentation to back up these findings or the details of the analysis. That was kept elsewhere. We found that to be extraordinary, but I can't tell you how we got to that conclusion.

The Chair: Mr. Ranger may shed some light on this.

Mr. Louis Ranger: I think your question really is, how does one measure success here?

Mr. Shawn Murphy: That's my point.

Mr. Louis Ranger: One measure of success is whether the government is better off or worse off, but even though that was one criterion, I submit that it's a bit narrow.

If you go back to what we were trying to achieve, this goes back to 1987, when we used to set up a team to see what we do at our airports. You look at Vancouver and Montreal and Toronto and you ask why you would privatize that, why you would transfer that. We're making money, those are the gems, so why would we give that to someone else? The answer is quite simple. Even though we were making money in the late eighties and early nineties, we knew we would have to commit substantial capital investments. Do we really believe that we would have been able to find $4 billion for Pearson? We were making money, but we knew we would have to commit major financial investments to those airports, and we thought the better way to achieve the objective of having modern airports that can accommodate the traffic projections was to create a framework where you can attract private sector investments, which is what we did. At a time when the government was pursuing a deficit elimination objective, how could we possibly have thought that we could throw in $4 billion at Pearson and another billion elsewhere?

As I said in my introductory remarks, the measure of success for us is that this new regime has attracted $5 billion from the private sector, without the government having to put a penny in this.

The Chair: So there's the answer, Mr. Murphy. The government were able to get $5 billion out of the private sector.

You're up to eleven and a half minutes, so you can come back the next round.

[Translation]

Mr. Perron, please.

Mr. Gilles-A. Perron: Thank you, Mr. Chairman.

I would just like to make a few comments to you, Mr. Chairman. Transferring airport administration to the private sector may have been a good thing.

• 1630

There has been a serious problem, Mr. Chairman. The Department of Transport has not checked on the administration of these airports often enough. That was the first problem.

The second problem stems from the fact that the Department of Transport has not had legislation passed to control these individuals. Mr. Chairman, there is a situation in which a company that administers an airport hires a firm of consulting engineers to design airports in Europe, and the president of the firm in question is the head of the airport's board of directors. My eye! There is something wrong somewhere.

When the president of an airport authority decides to sell land at the airport and the land is not even available because it has been reserved for another purpose, there is something wrong with the system. That is why I asked Mr. Ranger how the new legislation will handle the operation of the system because the system could work, Mr. Ranger. How are you going to go about this? I hope you will have some good answers, because I can mention names such as: Auger, Benoît, Goyette, etc. I can name the people involved in this matter and who had all the skills required to administer Canadian property at no cost whatsoever and make a very good profit as well.

Mr. Louis Ranger: We know all the people you named very well. It should be mentioned that the same airport model produced some situations that were almost a complete success initially, and others where there were problems. If you read our reactions to each of the Auditor General's recommendations, you will see that we acknowledged that more work had to be done. That is why, when I outlined our three approaches, I started with the first one. We have now adopted a much tighter system so that we can track developments at each airport more closely.

When we talk about defining governance models, that means that we have to re-examine how the boards of directors operate. There must be greater transparency in the decision-making process, for airport improvement fees or any other matter. The planning process should be more transparent. There should be a public debate when a master plan is developed for an airport. The act should provide for deadlines, before airports can make any changes.

Moreover, the concept of transparency is the focus of the bill we are drafting.

Mr. Gilles-A. Perron: That is the problem, Mr. Ranger. In the case of the ADM, which is a sensitive issue, you will remember that there were transfers from Mirabel airport to Dorval. The people I named earlier promoted the project by presenting falsified reports. You are aware of this. I am not the one who said it, it was said by Mr. Justice Viau. Mr. Justice Viau wrote this in his judgment, which was never contested. They used falsified reports. When we ask questions of the department or the minister, we are told that the Agency is smart enough, good enough, and big enough to deal with its own problems.

How much will this transfer cost? When will the airport be returned to Mirabel? These studies were falsified, I repeat “falsified” That is not my word, but the one used by Mr. Justice Viau. I am sure you have followed this matter. You are familiar with the issue. Do you think this is being administered properly?

I think the Department of Transport has to admit its guilt. It should have been present more often, it should have been more involved. Does this make any sense? We are having millions of dollars of taxpayers' money managed by taxpayers without having a single representative from the Department of Transport on the committee. There is one now, because the situation has changed, but there was no representative at the time. There had never been any representative since 1982 or 1992 when this all began. There had never been a Transport representative on the committee. That makes perfect sense. That tells the people in authority that the box is open and they can help themselves. That is what this means. I hope the new legislation will be much tougher and provide much better oversight of the entire operation, Mr. Ranger.

• 1635

Mr. Louis Ranger: There is no doubt that the bill will state very specifically who will be on the board of directors and by whom they will be appointed. In future, there will be no negotiated solutions, as happened in the past, in the case of the first four. Montreal was slow in this regard. As I said earlier, the objective of the legislation is to standardize the governance of all airports.

Mr. Gilles-A. Perron: That is all I have to say. I have to be careful about my heart, but I am not angry.

[English]

The Chair: Mr. Murphy.

Mr. Shawn Murphy: I have a couple of questions for Mr. Ranger, and perhaps Mr. Bell.

It's my understanding that the contracts made between the Department of Transport and the individual authorities call for a special audit to be done every five years. Do I take it that's not being done?

Mr. Louis Ranger: Yes.

Mr. David Bell: One of the transparency aspects of it was that after five years of operation each of the NAS airports must conduct an independent review of those first five years and make it public, defend it publicly. That's being done by them all. Some of the haven't hit five years yet, that's why you haven't seen it. As an example, Vancouver has done one, Winnipeg is about to get theirs started. So they are being done, and that's part of the public accountability and transparency regime that is currently in place.

Mr. Shawn Murphy: These special audits would, needless to say, flag any and all violations of any agreements made between the government and the airport.

Mr. David Bell: They would flag a number of things. They're very much public transparency pieces of work. If there were discrepancies, you would expect those to come out in those kinds of five-year reviews.

There's also a second thing, where we annually go and monitor the lease between ourselves and the airport authority. That's a regime we recently set up, that we go through clause by clause.

Mr. Shawn Murphy: And you weren't doing that, I take it, before.

Mr. David Bell: We weren't doing that in a formal way, and that was a comment of the Auditor General, that we had not been diligent enough in this area. We're doing that on a much more formal basis, with an annual report on each airport and the management of the lease, on both sides, in fairness to the airport authority, because we have obligations also under the lease.

Mr. Shawn Murphy: Who does these special audits?

Mr. David Bell: It's usually an independent outside party that does the five-year review, hired by the airport authority, but there are also the audits. There are the annual audited statements of the authority—

Mr. Shawn Murphy: I realize that, yes.

Mr. David Bell: -done by an independent auditor, a professional auditing firm, that are made public, part of the annual report each year. There are many public transparency issues, but this is a five-year review, and they have tended to look not only at the financial aspects, but at the operational aspects, the level of satisfaction of customers, the capital program, the planning, all aspects of an airport operation.

The Chair: Mr. Minto, you have something to say on this.

Mr. Shahid Minto: For clarification, let me just refer you to paragraph 137 of the report:

We note that airport leases require airport authorities to review and report on their own performance every five years. However, we are concerned that Transport Canada has not communicated to airport authorities its requirements and interests as overseer and landlord of the system. Consequently, it may not be able to ensure that the reports fully meet its information needs.

Transport had not told these authorities what was required.

Just to go on to some quick issues—

The Chair: Before we go on to your other issues, Mr. Minto, I would like to ask Mr. Ranger, on that point, why don't you ask these questions?

Mr. Louis Ranger: I'd like Mr. Bell to answer.

Mr. David Bell: The question, sorry—could you help me again, please?

The Chair: I quote from the Auditor General's paragraph 137.

However, we are concerned that Transport Canada has not communicated to airport authorities its requirements and interests as overseer and landlord of the system. Consequently, it may not be able to ensure the reports fully meet its information needs.

You didn't ask the question. You said go ahead, do a review, and that's fine.

Mr. David Bell: What we said at the time—and this was in the initial stages, I recognize that—was, you have to do an annual report and a five-year review; the five-year review should cover some broad things. But Mr. Minto's right, we weren't very specific, because within the lease we didn't have that capacity. The airport legislation will deal with that issue much more specifically.

The Chair: You didn't communicate at all. Is that right, Mr. Minto?

• 1640

Mr. Shahid Minto: Mr. Chairman, they had not specified what they needed at that time, and the reason they hadn't, if you read the rest of this section of the report, is that the department hadn't formulated its own position and its own needs as landlord at that time.

The Chair: This is five years after the fact.

Mr. Shahid Minto: Eight years into the transfers.

The Chair: Oh, eight years.

Mr. Shahid Minto: Eight years into the transfers, I think.

So our position was that, and we specified some things we thought they would be interested in and would be important for the public purse and public policy. I'm encouraged to hear from Mr. Ranger today that when they're doing the new legislation, this is going to be in there and they're going to do something about it.

Can I just take you back also to paragraph 133 for one second, because you started with the auditing, Mr. Murphy?

According to the leases, the Department has the unrestricted right to audit airport authorities In keeping with its hands-off approach, however, Transport Canada has not exercised this right at any of the major airports since 1995.

Perhaps the committee can encourage them to do this, or maybe they've done it in the last few months—I'm not aware of it. I think this would be most helpful.

Mr. Shawn Murphy: Correct me if I'm wrong, but my understanding is that the airport authorities should really undergo a special audit similar to what your department does for the crown corporations, a very extensive audit on all aspects of the airport authority, and report directly to the minister, and through the minister to Parliament. I take it that's not really being done.

Mr. Shahid Minto: If I could, Mr. Chairman, our understanding is that what is required is a review of their performance. I don't think I've seen anywhere a stipulation of exactly whether it's an audit, an examination, a review, what kind of standards, what methodology, what kind of report, what would be the nature of this. We are obviously not the auditors of that authority. But you're right, our expectation would be that it would be something like the special exam we do with crown corporations and a performance review. I have not seen that specification anywhere. Part of the reason we wrote paragraph 137 is that maybe it's time to develop something. What is the expectation coming out of this review? Is it going to be left entirely up to the authority to define its own review?

Mr. Shawn Murphy: We hope not.

Mr. Shahid Minto: Well, that would be our hope, absolutely.

The Chair: I find when I go through this chapter, gentlemen, that it's just a litany of lackadaisical attitudes to the taxpayer's money, of billions of dollars of capital investments over many years of which you largely washed your hands; you passed the buck and gave it to the airport authorities. I understand the motivation in the deficit reduction days. It was good to set up these organizations. They could borrow in the private sector, rather than have to dip into CRF. But at paragraph 2 under the main points the Auditor General says;

Transport Canada did not determine the fair market value of the airport assets and business opportunities it was transferring.

Right at the beginning you just said, hand it away, let's sign some kind of lease, but we don't know what we're giving away, we don't know what it's worth. How did you negotiate a lease? How did you say, you'll pay us x number of dollars back, because we're giving you x number of dollars of capital assets?

Mr. Louis Ranger: This is one of the few areas in the report where we agreed to disagree. I will not say that Mr. Minto is a good friend of mine, because it would be inappropriate, but I've known Mr. Minto for 18 years.

The Chair: Did you do the asset evaluation on that? We're not worried about who's a friend and that.

Mr. Louis Ranger: On that issue we did agree.

The Chair: You did an evaluation of the assets.

Mr. Louis Ranger: No. We did agree with the statement that what we did seemed to be wrong. The suggestion is that we should have established the fair market value of airports.

The Chair: Did you have any value for the airports? Did you know what you were transferring?

Mr. Louis Ranger: Sure, evaluation was done, but it's not a fair market value. Airports, sir, were never for sale on the market.

The Chair: I know.

Mr. Louis Ranger: There was no market. We consulted extensively. We bought the best advice money could buy.

The Chair: But you've got $200 million worth of revenue, I think, according to Mr. Bell.

Mr. Louis Ranger: Yes.

The Chair: Capitalize that at 8%, there's an evaluation, let's say about $2.5 billion in total.

Mr. Louis Ranger: And there are probably seven or eight different types of values that one could look at. Is book value better? Is the going concern value better?

The Chair: So which one did you chose?

Mr. Louis Ranger: Basically, it's something that's close to a going concern value. It was basically net present value of the future stream of revenues. And this was based on advice from a series of consultants whose names I could provide you with.

• 1645

The Chair: Okay. But you're saying going concern valuation.

Mr. Minto.

Mr. Shahid Minto: Mr. Chairman, let me draw your attention to paragraph 63. In paragraph 59 we said:

We found Transport Canada had not determined the worth—the fair market value—of what it was transferring....

Certainly, our position was never, you go and do a fair market value assessment, and that's what you should have. We were concerned that you had to provide a range of values to decision-makers saying, somewhere in this range is where the fair value is. What the department did was develop a floor position. They said, this is our floor position, rather than saying, this is the floor, but what else? Our discussion is not dissimilar to the one we had on Nav Canada, where the department said we got fair value. Our question really is, fair value compared to what? What was the benchmark? Our whole point is, the fair market value would have provided at least one benchmark to compare it to.

The Chair: So what you're saying is that they could.... I think of Edmonton, for example, as one close to me, 3,200 acres on the edge of town or out of town, plus a 16-storey high-rise building, plus 100,000 square feet of space. You can value that, and then you can say, okay, because this has to be valued as a going concern, there's no market per se for airports, you either discount or enhance the value and say, this is what we feel is the appropriate value we should transfer it at. You're saying, Mr. Minto, that basic exercise wasn't done, you only did a going concern valuation. Right?

Mr. Louis Ranger: The professional advice we got from investment bankers was that we should not waste our time trying to set a market value—those airports were not for sale. The objective at the time was to select local interest groups, identify them as the future airport authority, and sit down with them and negotiate an arrangement. But we obviously needed to be consistent across the system, so we did have a uniform base, the net present value of future streams of revenues, as a starting point.

But each airport being different, some required upfront capital investments, in some cases the government provided that money, in other cases the airport authority was prepared to raise the money, and in return we would provide a rent holiday. So a different formula might develop, but from a base that was uniform across the system.

The Chair: If you're talking about these types of things, going concern, you put a value of $56 million on Edmonton, and you're getting negative rent, you're paying them as the landlord. This is something new to me. You're paying them as a landlord—here's some money to go and operate an airport—and yet the thing has a value of $56 million. I have a problem here. If it's a going concern at a loss, its value would be nil or negative, but you've got $56 million, according to the AG at paragraph 60. How do you square that circle? At paragraph 60 you see that the value computed in 1990 by the financial adviser, your financial adviser, was $56 million for Edmonton, while at paragraph 95 you've got negative rent. What's the taxpayer getting out of this? There has to be half a billion dollars of investment over there—3,200 acres of land.

Mr. David Bell: If I can try that one, Mr. Chairman, with the calculation there, the $56 million, I must confess I don't remember where it came from.

The Chair: It says right here “the value computed in 1990 by the financial advisor”.

Mr. David Bell: I'm trying to remember—is that the value of the assets, is that the value of the going concern? I'm sorry, I can't remember what that number is.

The Chair: You tell me you didn't do an asset valuation, only a going concern valuation. Under the lease option for Montreal, Vancouver, and Edmonton the going concern value was $56 million, and now we're paying them money on top of that.

Mr. David Bell: But there's the rent formula stream over the life of the lease. It may be they are not paying rent at this point, but over the life of the lease they will pay the rent.

The Chair: How long is the lease?

Mr. David Bell: Sixty years, with 20 years renewable.

The Chair: Okay.

Mr. David Bell: So in the short term there may not be a return, but over the life of the lease there would be.

• 1650

The Chair: Then perhaps you might like to write a letter to the committee telling us how you are going to get a return on the $56 million and recoup this negative rent you're paying to Edmonton. Is that possible? Can you write us a letter?

Mr. David Bell: We can try to write you that letter, yes. Recognize that there's a rent policy review going on, of course, that's trying to address this issue writ large across the system.

The Chair: Looking at paragraph 63, which follows on from 62, you have these consultants doing.... In paragraph 62 it says:

We note that some of the key elements of the entity to be transferred were clarified only in 1992....

It goes on to speak of:

...transfer arrangements negotiated with airport authorities, which, among other things, allowed airport authorities to levy user charges. Moreover, a decision was made not to regulate those charges.

It goes on in paragraph 63;

We find it disturbing that Transport Canada decided not to determine the worth—the fair market value—of what it was transferring....

I still come back to this. There seems to be a kind of a haphazard attitude—give it to them, negotiate some money back, and we're happy. Where is the fundamental analysis of your decision-making to ensure that you are getting value for money on behalf of taxpayers?

Mr. Louis Ranger: As I said, the starting point was a uniform approach across all airports. Then each airport was negotiated, one at a time, and there are a whole set of variables that came into the negotiation. The Auditor General pointed out that we did not keep an exact trace of what those changes were and what motivated those changes, and we've accepted that as a fair criticism. We have attempted, to the extent possible, to identify all those variations and what were the reasons behind them. I don't think we will ever have the full picture.

We are trying now to do a rent review in an attempt, to the extent possible, to have a more standardized approach. There are airports, Ottawa being one, that consider they're paying a rent that is too high compared to others. We have to go back and look exactly at how we arrived at those results. At the time those were negotiated agreements between—

The Chair: I look again at the AG's main points:

The department has renegotiated four leases, at a cost to the government of about $474 million in foregone rent.... Further, Transport Canada cannot demonstrate how the deals for all of the transferred airports are equitable, uniform, consistent and fair, one with the other, as the government directed.

The AG is saying, as much as you talk about this fair and equitable thing—one plan fits everybody—you're not doing that. Right, Mr. McLaughlin?

Mr. Michael McLaughlin: That's right, sir.

Mr. Louis Ranger: Sir, if we thought the AG didn't have a point, we would not have agreed to undertake the rent review. We are doing a rent review because we recognize—

The Chair: If you're doing a rent review, don't tell us you have been conducting a full and fair and equitable process, because the Auditor General says you haven't, and you're not disagreeing with him.

Mr. Louis Ranger: Just to be clear, I'm saying the starting point was a uniform approach, going concern valuation, but then there are a lot of other factors that entered into consideration in the negotiation, which fact has at least created the appearance of inconsistency from one airport to another. We're prepared to have another look at how those rents were established.

The Chair: Okay, well answer this question, again from the main points.

As a result of renegotiations, the government has, in effect, agreed to a reduction of future revenues of the Crown and to the funding of significant capital projects.

Have you built in a return on your additional investment on the significant capital projects, so you are going to get a return on our investment of taxpayers' money? Is that built into the lease, so we're going to get some extra money back, because we've invested some capital moneys in there?

Mr. David Bell: Later on, yes. What he's referring to is that in a couple of cases where we asked airport authorities to take on some specific capital projects, what we said was, instead of our paying for those—those were ones we would have taken on—you pay for them, and we will give you rent relief to cover that amount. That's what that's referring to. So in those cases the rent was reduced for a period of time to equal the amount we would have spent had we done that project ourself. That's what he's referring to, I believe.

Mr. Gilles-A. Perron: Which airport?

Mr. David Bell: That one happened to be Toronto.

• 1655

The Chair: Excuse me, but I got a different impression. I got the impression that the government was actually putting up the capital cost. Am I right, Mr. Minto?

Mr. Shahid Minto: Yes.

The Chair: So what's this about the foregone rent because they put up the capital cost?

Mr. David Bell: In the Toronto case we asked them to do $180 million worth of work that we would have done. We did not do it, and we reduced the rent by that amount. We didn't spend it, they did. It was a different way of financing the project.

The Chair: Mr. Minto.

Mr. Shahid Minto: Mr. Chairman, most respectfully, I would have to disagree with the last statement, and let me tell you why. Let me draw your attention to paragraph 102, where we start talking about the Toronto deal that has been renegotiated. We say:

In effect, the airport authority was granted a rent reduction of $185 million for capital works projects at the airport; $103 million of this was credited in the first year...

and the rest for later. We asked the department about the reasons for this rent reduction and the legal responsibility or the liability of the government to do so. We were provided with a press release. Let me just take you through this paragraph. This is a very important paragraph, sir, because it deals with the very issue of fairness.

What this press release said was, there are three capital projects that will now be completed by the authority, and therefore we are going for the rent reduction. Unfortunately, we found the press release that was issued at the time the deal was signed, and it said, we are transferring it as is, where is, and these three projects are now the responsibility of the authority. So in the discussion and the negotiation of the initial transfer those exact three projects had already been assumed by the authority as their responsibility. Then, within two weeks after signing, you reopen the lease, and you give them a credit.

Our question was not on the policy—we don't question their policy in this thing—but, where's the legal responsibility through that? Are we paying for this twice now? You have the original lease, and now we're reducing the rent? Then we followed up by saying, how was this ever disclosed to Parliament? In fact, instead of providing an appropriation to fund a capital project, which would have gone through the estimates process, you have said, forget about giving us the rent due to the crown. So that was our concern.

Let me just take you back one more second to page 31 of the English edition. This is paragraph 90. We were talking about the renegotiated leases. We said:

The renegotiated deals effectively reduced the revenue stream or rent payable to the Department by an estimated $289 million total over the term of the three leases, with no clear indication, in our view, as to what benefits the Crown would receive from the substantial rent reductions that were renegotiated. The Department informed us that the benefits were “to relieve the following pressures that were deriving renegotiations...”

Then we list the pressures.

I think we do have to remember that the people who did these negotiations are not the people who are at the table or even in the department any more. One of our problems in the audit was trying to find somebody who was there when this was done. But that's the picture that emerged from our review.

The Chair: Let's see if I can bring this to a conclusion here.

With Toronto airport, we agreed and signed a lease, and during these negotiations the new airport authority agreed that these additional capital projects would be their responsibility, and they signed the lease. Two weeks later we give them a huge $185 million reduction, of which $103 million was granted in the first year, so that they could do these capital projects they accepted under the lease. Is that correct, Mr. Ranger?

Mr. David Bell: Yes.

The Chair: That is correct.

Mr. David Bell: My understanding of it—and as Shahid said, I was not there—is that the lease was close to being negotiated, there were three outstanding items, and instead of the department paying for them, there was a rent reduction to cover those. That's my understanding of how that worked.

The Chair: Mr. Minto.

Mr. Shahid Minto: Mr. Chairman, that's not what we saw in the documents. As a matter of fact, we went to the department and said, maybe we are missing something here, can you point out to us where it says there are three items that have to be carried over for final clearance? We're willing to accept that when you close a lease, there will be outstanding items, and on these three we were quite prepared to say, maybe we missed it somewhere. I personally sat in a meeting, we wrote a letter to them, and we were not provided with any documentation to back that up. There may have been an understanding in people's minds, but there was nothing in any documents that we could see to back up that point.

• 1700

The Chair: So you forgive the rent, so that they can, in essence, spend some capital moneys to increase revenues through accelerated growth, passenger traffic, and so on.

[Translation]

You have the floor, Mr. Bertrand.

Mr. Robert Bertrand: Mr. Ranger, I would like to discuss the standards that will be included in the bill you mentioned, which is to be tabled in the House. You said that there would be national standards for the vast majority of airports.

Can you tell me if there will be standards for passenger safety?

Mr. Louis Ranger: Passenger safety will be governed by departmental regulations. The department will establish safety standards in airports for everything regarding aeronautics. The airport itself will determine how many commissionaires will be required. This is not aviation as such, but everything relating to it. Aviation security issues are governed by existing legislation, the Aeronautics Act, that is amended and improved on a regular basis. There is no need to legislate, it is already in force.

Mr. Robert Bertrand: I assume that the contract for screening the baggage prior to boarding will go to the lowest bidder.

Mr. Louis Ranger: I am happy to answer that question. This situation existed well before the airports were transferred. Ever since security screening has existed in airports, since the late 1970s, I believe, it has always been the responsibility of the airline companies. In each airport, the airline company with the largest presence—most of the time Air Canada—is entrusted with this responsibility and is primarily responsible for these operations. The airline companies agree among themselves on paying for the service.

You are right in saying that since September 11, this has become a hot topic. Airline companies have in fact often hired people who are paid the minimum wage, in order to save money, and turnover is very high. People do not stay in these positions very long. I think that Mr. Collenette has said several times that we are examining all of our options to improve the situation. As you are undoubtedly aware, the Bush administration has recently taken action in this area. We have not yet made a final decision, but we are currently working on the matter.

If legislative amendments were necessary to implement our preferred model, legislation would be required.

Mr. Robert Bertrand: I assume you will be consulted when the bill is drafted.

Mr. Louis Ranger: Absolutely. All of the work is done in the same way, whether we are looking at a bill on airports, or the issue of airport security, including what we call pre-board screening. It all comes under the Aeronautics Act and Mr. Collenette is responsible for that. It is part of our responsibilities, and therefore part of mine. As associate deputy minister, that is my responsibility.

Mr. Robert Bertrand: I do not know how to ask you another question, about something that bothers me. After what happened on September 11, do you plan to ask the airports to provide security or would you prefer it to come under your department?

• 1705

Mr. Louis Ranger: There are currently a host of options. There is the American model, in certain European countries, where airports are responsible for security, which corresponds to public perception. The average person who goes to an airport and who goes to security screening takes for granted that he is dealing with airport employees, whereas the people are not airport employees, but often employees of local security agencies hired by airline companies.

So that is one model. That model has existed forever. The other model, the other extreme, would be having the government, or Transport Canada, carry out this responsibility and, between the two, there are a host of other options. Entrusting the airports with this responsibility would be another. There are other options and we are currently examining them all.

Mr. Robert Bertrand: With respect to security inside the airports, according to the airport, these administrations have signed contracts with police forces. Some have signed contracts with the RCMP, and others with other police forces. Do you foresee asking the RCMP to take over security throughout the country?

Mr. Louis Ranger: The current situation is working. The airline companies are currently responsible for screening you and your luggage when you go to the airport. As I already mentioned, we are looking at all of the options.

The airports also have different types of surveillance services. We require an on-site police force in the large airports and, most of the time, they hire local police forces. In some provinces, as you know, the RCMP is the local police force. So they carry out these responsibilities.

We require fewer police officers in the smaller airports, or often, we will require the police to be able to reach the airport in five minutes if called, if a crime has been committed of if other incidents occur.

So there are a range of measures. And I reiterate, we are currently examining them. Since September 11, airports, on their own initiative, have incurred additional expenses to provide enhanced service. Everyone in this room travels a lot. You have seen that there is more police visibility in the airports. To date, all of that has been at the airports' expense.

I need not say that they are making representations, stating that it was unforeseen and that there are additional costs involved. They are asking for government assistance.

[English]

The Chair: There's time for one brief one.

[Translation]

Mr. Robert Bertrand: I am going to quote an excerpt from Chapter 10 of the English version of the report:

[English]

The Calgary, Pearson and Vancouver airports accounted for over 95% of Transport Canada's total revenues from rent in 1998.

[Translation]

We are talking about three airports out of 25. So I assume that the others, almost all of the other 22, are in the red.

[English]

Mr. David Bell: Right now there are eight airports paying rent. The others do not pay rent at this time, because we turned them over in a money-losing position. They will pay rent over a longer period of time. When we transferred those larger airports, they were already in a revenue positive cashflow, so we took rent from them right away. As time goes on, more of them come on stream. That's why you see a growing total amount of revenue to the crown coming from two factors, growth at some airports, plus others coming on stream over a longer period of time. But right now Vancouver, Calgary, and Toronto are the big ones, because they have the big volume of traffic.

An hon. member: What about Ottawa?

Mr. David Bell: Ottawa pays rent. Ottawa is one of the eight payers right now.

Ms. Beth Phinney: Does Hamilton pay rent?

Mr. David Bell: Hamilton does not pay rent. Hamilton is not a national airport. Hamilton is run by the local community.

Mr. Louis Ranger: Valérie will give you the list of the eight airports that pay rent.

Ms. Valérie Dufour: Right now Vancouver, Calgary,

[Translation]

The Montreal airports,

[English]

Edmonton, Toronto, Winnipeg, Ottawa, and Victoria pay rent. All the others will pay rent at some future date.

• 1710

The Chair: What about the negative rent in Edmonton—it's now positive rent?

Ms. Valérie Dufour: Yes, it's returned to positive rent.

The Chair: I'm a little concerned about this notion of forgiving rent when you turned them over in a deficit position. Where is the incentive for them to really capitalize on their assets to ensure that they maximize the revenue? Here we find some are taking them off site so that they don't have to pay rent on the revenue-producing assets, and now we're paying them because they don't have capitalized entrepreneurial opportunities on their site. It seems to be a little off-balance, wouldn't you say, Mr. Bell?

Mr. David Bell: When we turned airports in a deficit position, I think it would be inappropriate to be taking rent and putting them in more of a deficit position. With the airports that were losing money when we transferred them, we gave them a period to generate additional revenue, to get themselves in a positive cashflow. Then is when the rent cuts in. That's the process.

The Chair: Do you give them a specific period, or is it just whenever they get into a positive position?

Mr. David Bell: There was a calculation as part of the process; it would be a period, and it varied by airport. It would be a period of five to seven years. Some of them are longer.

The Chair: Time-specific.

Mr. David Bell: Time-specific, yes, and that was part of the lease when the lease was signed.

The Chair: Looking at paragraph 92, I'm a little concerned about this. I'll just read bits of it.

In December 1996, while renegotiations were under way, Transport Canada informed the Treasury Board that LAAs at Calgary and Edmonton would adopt the new rent formula in full, and that Vancouver would adopt in part. The Department also said that the revised rents would not materially affect its budget; it projected a $7.5 million reduction in its budget over the first four years.... Only later, when the Treasury Board Secretariat requested a business case to support the renegotiations, did the Department estimate the rent reductions would cost over $124 million in the first five years.

That means you went out and did the homework after the fact.

In February 1997, Treasury Board approved the amendments to the leases on the basis that the three airports had agreed to adopt the Public Accountability Principles.

And renegotiations continued, and so on.

I get this poor management feel all the way through: it's not a big deal, it's only going to cost us $7.5 million. The Treasury Board said to do the numbers and you did the numbers—oops, it's $124 million. Do you find, Mr. Minto, that is a theme running through, that the management really wasn't focused on the job here?

Mr. Shahid Minto: Mr. Chairman, one of the issues we've raised a number of times is the weak analysis that was done, and the information that was provided to decision-makers within the department and outside was not always substantiated. This is an example of that, yes.

The Chair: Mr. Ranger, any response?

Mr. Louis Ranger: There is no doubt that throughout that period—again, we've acknowledged that there have been flaws—not only did we have to look after airports that had been transferred, but I must say a lot of energy was being deployed on negotiating other airports. The thrust was to move on that model, and overall it was quite successful. There's no doubt that now 25 out of 26 are done, we can do a much better job in monitoring.

The Chair: I find it hard when you say you were successful. The Auditor General reported it cost us $1 billion on the underpriced sale of Nav Canada. Whether you like it or not, that was his figure. And now we're talking about $7.5 million, which turned out to be $124 million. Then I take a look at paragraph 140, and it says:

The Department has neither carried out a comprehensive study nor performed any systematic monitoring of the financial health and viability of the NAS as a whole,

And we continue with paragraph 141:

In our view, a systematic approach to monitoring is long overdue.

• 1715

Remember that the Auditor General's report is October 2000. That's over a year ago. You're now telling us you're thinking about bringing in some legislation. It seems there's been no real motivation on your department's part to address these concerns and to provide value for the taxpayers' money.

Mr. Louis Ranger: There's been very extensive work done, as you can imagine, to get cabinet to agree to bring in legislation. You do have to first brief cabinet on results of the five-year review we did. We went to cabinet twice, and we consulted with airports, and we've now committed ourselves to consult airports, not just on broad concepts, but on the actual draft of the bill, so that when we actually bring that bill to the transport committee, we will have a chance to hear all the comments. It's going to be a very elaborate bill, and we are determined to get the input from all stakeholders.

The Chair: It doesn't require legislation to improve managerial practices. You have chosen to wait until the legislation goes through to improve your managerial practices, but these points made by the Auditor General are just a series of problems involving lack of concern about the fact that taxpayers' money has been wasted at every turn.

Mr. Bell, you want to say something on this.

Mr. David Bell: Differentiating the legislation is something I tried to speak about a little earlier, and maybe it's germane to this. As a result of some work we're already doing, the LAA lease review, and the work by the Auditor General, we have two things that are actually up and running. We do an actual lease monitoring process at each site. We go there, we do a visit, we write a report on every aspect of the lease. That has been done, and we've finished our first full cycle. It took some time to get that up and going, but that is done, and the reports are in. The second thing we're doing now is taking the annual reports and doing analysis of them as to their viability, the financial information, and the operational information, and providing an overall system view. Third, we get quarterly reports from the airport authorities, and we carry out analyses on those.

So I do think we are conducting a much more severe managerial scrutiny at this point. There is also the legislation and the rent review to come, but we're actually, on a day-to-day landlord basis, doing much more than we were when the Auditor General reported.

The Chair: At paragraph 81, the Auditor General says:

We therefore are unable to verify and provide any assurance on the results of the analysis.

The analysis cost $680,000 and was completed a year before the end of their audit in February 2000:

...we found that decision makers, including Treasury Board, had not yet seen the results.

You hadn't passed it on. That's $680,000 worth,

Also, in Mr. McLaughlin's opening statement he said:

In 1997 it started a mandatory five-year review designed to determine the financial impact of the transfers and recommend an appropriate policy framework. In October 2000 the review exercise, which had cost over $2 million and was to have been completed in June 1998, had not been finalized.

It was to have been completed in June of 1998, but hadn't been finalized—two years overdue. Two million bucks, two years overdue. What's going on?

Mr. Louis Ranger: It's true that we spent a lot of money on that review. Mr. Bell was leading that team. We relied on outside advice extensively. The findings of those many studies were condensed into one document, which we called the consultation report, which was sent to all airports. Several meetings were held to get reactions to those reports. We went to cabinet committee in May 2000 with the results, and we went back to cabinet committee in March 2001, and then to full cabinet, using that information to get approval to go ahead with drafting legislation. So we've put all that information to good use, and we're proceeding with the remedial action.

The Chair: The Auditor General says in October, 2000 it hadn't even been completed. Is he wrong?

Mr. Louis Ranger: Do you want to comment?

Mr. David Bell: Maybe you should ask him.

The Chair: I will.

Mr. David Bell: If completion means we had not gone back to Treasury Board, sending them a letter saying the last study is over and done—but you should ask him, I think, Mr. Chair.

The Chair: Mr. Minto.

Mr. Shahid Minto: Mr. Chairman, could you refer me to the paragraph you just quoted from?

The Chair: I'm looking at paragraph five of the opening statement and the last line.

• 1720

Mr. Shahid Minto: I think we discussed that in paragraph 37 of the report:

In 1992, the Treasury Board directed the Department to carry out a comprehensive evaluation.... The Treasury Board reiterated that direction in 1997.... Although it was to have been completed in June 1998, the review exercise (which has cost almost $2 million) had not been finalized at the end of our audit in February 2000.

The Chair: So in February 2000 it wasn't finished, but it was finished shortly thereafter.

Mr. Shahid Minto: I think that is what my colleagues here we're talking about.

[Translation]

The Chair: Mr. Perron, please go ahead.

Mr. Gilles-A. Perron: I have a question for Mr. Minto. The Toronto airport's lease was reduced by roughly $185 million, and following that, the airport made some investments. Can you tell me what project it invested in, which terminal and which runway?

[English]

Mr. David Bell: If I remember rightly, it was the completion of a fire hall, a de-icing facility, and I'm trying to remember the third one.

Mr. Shahid Minto: It was a north-south runway.

Mr. David Bell: A north-south runway.

Mr. Shahid Minto: You're asking me what it was spent on? This is what it was designed for. We have not followed up to see where it was actually spent.

Mr. David Bell: And those facilities have been built, so that's where the money went.

[Translation]

Mr. Gilles-A. Perron: The purpose of my question is to try to get an answer. Does Air Canada have direct influence over the local authorities? I am mentioning this to give you some background. When the idea of transferring international flights from Mirabel to Dorval was examined, the only one in favour of that option was Air Canada. All of the other airlines were against it. Why? Once again we gave in to Air Canada, and ADM has complied with Air Canada requirements on several occasions. Does Air Canada have the power to exert pressure on the local airport authorities? That is my question, which is of course hypothetical.

Ms. Valérie Dufour: Air Canada's major presence in each airport is not negligible. However, it does not have any formal privileges. On the contrary, it sits on the committee of airline companies, more specifically on the committees in the national system, that are set up by each airport authority in order to be consulted on development and operations and infrastructure management.

In the context of the Competition Act and airline restructuring, we did recognize that Air Canada had significant influence. Through legislation, we try to ensure that all carriers have equal access and that the regulations guarantee that. The fact remains however that someone generating more than 60% of all activity in an airport does have a lot to say over what changes are made. We are simply going to try to make sure that this importance is not disproportionate with respect to the airport's objectives.

Mr. Gilles-A. Perron: I would like to bring some gossip to your attention. Rumour has it that Customs Agency officers are often seen flying at Air Canada's expense, around Europe, for two months or so. It is a rumour about a little kickback scheme. I won't say anything more about it. Perhaps your monitoring agency should look into the rumour.

I would like to ask another question about something that concerns me.

Ms. Valérie Dufour: Which agency are you directing your question to?

Mr. Gilles-A. Perron: ADM.

Something else bothers me. Why didn't the provincial police win the contract for security inside the Dorval airport, when its bid was the lowest? Is it because it is incompetent?

• 1725

Ms. Valérie Dufour: I cannot answer that. I have—

Mr. Gilles-A. Perron: I would like you to try and find the answer, please.

Ms. Valérie Dufour: Okay, we are making note of that. Are you referring to the most recent bid?

Mr. Gilles-A. Perron: I am talking about the one from last year, the one covering the current period, the last bid.

Mr. Louis Ranger: We do not have an answer.

Ms. Valérie Dufour: No.

[English]

The Chair: Unfortunately, we have to bring this conversation to a close, but I have one simple question, Mr. Ranger. Since airports are no longer reporting to Parliament, because they're off the balance sheet for Transport Canada, would you be prepared to ensure that there is a good discussion and report on airports in the annual performance report of Transport Canada? Can we look forward to seeing that, facts and figures, profitability, capital investment, and so on in your report?

Mr. Louis Ranger: I'd like to take that on board. That's an interesting request.

We do an annual report because we're required by the Canada Transportation Act to do so. The section of the act that deals with that specifies where the focus should be, and we're about to review that act. We could take that suggestion on board and see whether we might incorporate it as an ongoing request that we cover this more explicitly in our annual report.

The Chair: We're now going to get closing comments by Mr. McLaughlin.

Mr. Michael McLaughlin: Thank you, Mr. Chair.

We're certainly concerned about the national airport system. We believe that if, at the time they were doing these transfers, they had had a codified policy framework, it would have helped to answer many of the questions that have been posed today. But we are very encouraged by the steps the department has taken and is contemplating, and certainly, the proof of the pudding is in the eating. We would like to see the results that come from this, in particular the lease reviews and the treatment of subsidiaries, which were of considerable concern to us. And a report to Parliament would be quite interesting to see as well as part of the departmental performance report.

The legislation that is now being drafted and put into place I think is going to be critical for ensuring transparency and accountability for the national airport system and the integrity of the entire system, not just individual airports.

Thank you, Mr. Chair.

The Chair: Thank you, Mr. McLaughlin.

The next meeting is scheduled for Thursday, November 22, at 3:30 p.m. Until then this committee stands adjourned.