Terminal case: privatizing Canada’s biggest airport provokes many questions

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Abstract:

Ottawa announced Aug 30, 1993, that Toronto’s Lester B. Pearson International Airport would be taken over by private owners. The move is expected to create 1,000 jobs in the province. Opponents of the plan worry that costs will increase and regulation of the airport will be more difficult.

Full Text:

The news on Aug. 30 that Ottawa had concluded a general agreement” to privatize two terminals at Toronto’s Lester B. Pearson International Airport meant many things to many people. For the government, it was a key step in realizing its 1987 policy to divest itself of control of Canada’s airports. It was also an opportunity for the Conservative party to create more than 1,000 new jobs in the key province of Ontario prior to a federal election. For the Pearson Development Corp. (PDC), a private consortium that includes Conservative party stalwart Donald Matthews, the deal to upgrade the airport’s Terminal 1 and Terminal 2 facilities represented the fruition of two years of work on a winning bid–and a lucrative monopoly over Canada’s largest airport. For the airlines that use Pearson, the agreement renewed concerns about escalating costs in an era of cutthroat competition. But for Chern Heed, general manager of Pearson, the announcement was downright disruptive. We’re running around now trying to fix the value of the fixtures that are part of this deal,” said Heed. That’s about 10,000 seats, ashtrays, potted plants and computers to count.”

The upheaval at Pearson airport, however, is just beginning. As soon as the lease is signed in November, PDC will start the first phase of a $700-million, 10-year renovation and construction program. Although Transport Canada and Air Canada spent $125 million to improve Terminal 2 in 1991, PDC plans to spend another $340 million by 1995 to further expand the facility. In the final stage of the proposal, in 1999, PDC plans to demolish Terminal 1 and rebuild it. The consortium forecasts that, despite the global slump in air travel, passenger traffic will grow by an average annual rate of three per cent over that period, ensuring that the new capacity at Pearson is required. But not everyone agrees that the work is necessary at this point. Said Liberal party transport critic John Manley: Those are the kind of projections that got the airline industry into trouble in the first place.”

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Indeed, at a time when airports and airlines are forced to vie ferociously for business, Pearson’s privatization has raised a host of concerns. For one thing, while many airports in the United States are owned and managed by local authorities on a not-for-profit basis, private commercial ownership could dramatically increase the costs charged both to airlines and to passengers at Pearson. That, in turn, could diminish the competitiveness of the airport and the business it generates in the local economy. Under the terms of the deal with PDC, the group has the right to charge user fees with the approval of Transport Canada.

Yet another concern is that Pearson will not fall under the auspices of a local airport authority, as are the four other airports in Canada where control was relinquished by Ottawa. According to Patrice Miron, a spokesman for federal Transport Minister Jean Corbeil, there are still hurdles to overcome and criteria to meet” before such a group is formed in Toronto. Said Miron: There is still a role for a local authority in the future.” In Montreal, Calgary, Edmonton and Vancouver, where airport authority has already been transferred to local bodies, strategic economic development–not just profit–is considered crucial. Those concerned about the privatization of Pearson have also raised questions about the timing of the deal as well as the political ties of the consortium’s owners. PDC is comprised of two main groups, Paxport Inc. and T-3 Ltd. T-3 Ltd., which includes Claridge Group, a company owned by the Bronfman family of Montreal, is also the majority owner of Pearson’s Terminal 3. Paxport is 44-per-cent owned by the Matthews Group Ltd. and related companies controlled by London, Ont., businessman Donald Matthews. Matthews co-chaired the 1983 leadership campaign of former prime minister Brian Mulroney and he is also a former national president of the Conservative party.

The group within Paxport that assembled the Pearson bid was headed by Ray Hession, a former federal deputy minister of industry, science and technology. William Neville, who led Mulroney’s 1984 transition team, was the lobbyist for the Paxport proposal. Last week, former federal revenue minister Otto Jelinek said that he has accepted the presidency of Matthews Asia, a part of the Matthews Group.

The contract to privatize the two terminals is considered a prize, because Pearson is one of the few airports that has consistently made money for the federal government. As the hub of Canada’s air transport system, some 20 million passengers used Pearson in 1992, compared with 9.5 million in Montreal. Furthermore, Pearson’s revenues have traditionally been used to subsidize other Canadian airports.

For his part, Paxport’s chief executive officer, Jack Matthews, Donald’s son, acknowledges that he would be a fool to say there’s no political agenda attached to the timing of the deal.” But, he added, the pre-election push to privatize the airport stems principally from its potential for job creation. He also noted that there is a strong political focus on debt reduction.” One of Ottawa’s key considerations in transferring responsibility for airports is the desire to divest itself of the burden of capital-intensive maintenance and airport upgrades.

When it comes to influence with the Conservative party, however, Jack Matthews insisted that he is not really aware of such ties at my level.” In particular, he noted that Paxport had unsuccessfully bid on the contract to construct Terminal 3 in 1988, and that the bid review process this time was similarly lengthy, thorough and competitive.

Under the terms of the agreement, PDC holds a 37-year lease on the two terminals with an option to renew it for an additional 20 years. The federal government is paid an annual rent based on a percentage of gross revenues or a fixed minimum amount–whichever is higher. Ottawa now receives revenue of $23.6 million a year from the two terminals. In the first year of the lease, it will be paid $28 million, although it will defer $33 million in rent over the first several years of the lease to ensure that construction starts immediately. Transport Canada will continue, as it has at four other airports, to run security and air traffic control functions.

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At the same time, Ottawa has requested proposals for the $400-million construction of three new runways at Pearson. The Matthews Group and its Paxport partner Agra Industries Ltd. are among the groups bidding for that contract, which must be submitted by November. With so many interests, airport manager Heed says, there could be complications. We’re concerned about the co-ordination of efforts among various departments and factions,” he said. Gordon Sinclair, president of the Ottawa-based Air Transport Association of Canada added: In the aviation business you can’t afford to have one of the many subsystems foul up or there is chaos and disruption.” For the current and future managers of Canada’s largest airport, the early warning system is already on alert.

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