Prudent Press

4

The Highway 407 Hijack – How Ontario Became a Have Not Province Pt 5

Salman

In this part we look into the hasty privatization of the Highway 407 that would have numerous far reaching implications for Ontarians.

 

Highway 407

In May 1999, Ontario undertook the largest highway privatization in the world with the sale of Highway 407 ETR, which was dubbed the world’s only, open-access, fully electronic toll highway.

The initial history of Highway 407 dates back to 1973 when it was part of the planning of the ‘parkway belt’ planning area. At this time, the intention had been to create a parkway belt that would be the outside perimeter equivalent of the GTA and the highway would connect and link the suburbs of Hamilton, Halton, and the other surrounding regions together.

Highway 407 had been designed to ease the congestion that occurs with Highway 401. The price in building the Highway had been set at $20 million a kilometre, and so the Peterson Liberals (before Rae’s NDP) had searched for public and private partnerships as well as investors, that would assist with capital needed for the construction.

The Peterson Liberals had determined that the highway would have been established as a province owned toll collection highway, in order to assist with bringing in further revenue for the province. Rae’s NDP continued the proposal and the plan carried on until 1995 when the Harris PC’s came to power.

By the time Harris took power, Ontarian taxpayers had already doled out  over $1.6 billion dollars for the highway project.

However, by the time of the sale of the highway, several critical links in the routes of the highway were also built, at minimal cost to taxpayers. The critical links were expansions of the 407 traveling north to Brock Rd, and travelling south towards Hamilton.

The cost was estimated at $500 million, paid by the consortium that had bought the highway lease, thus this did not impact the budget.  However, the majority of the construction on the 407 had already been completed since the 1970s.

The total cost of the highway that opened in 1997 was $1.6 billion, but the amount of money spent in the 1970s to acquire the land that the highway ran along amounts to over $100 billion.

This amount was confirmed on October 21, 1998 records in the Legislative Assembly of Ontario.

MPP E.J. Douglas Rollins said,

How many dollars do we have invested in the 407 at the present time? As of March 31, the taxpayers of Ontario have somewhere around $104 billion. If we have that $104 billion invested in capital and if we can take that back from the private sector, sell it and put those dollars back in, we’ll make one more promise in the Common Sense Revolution when we sell that asset. Yes, ladies and gentlemen, we can pay down that debt we’ve inherited. That’s very important, not only to our generation and the commitment we made in the Common Sense Revolution but to the commitment we as a government have made to the people of Ontario.

 

Critics of the highway sale pointed out several pitfalls of the deal:

1) Incorrectly stating the sale of the highway as part of revenues

2) Consortium’s exemption from paying property taxes

3) Secret contract that was carried out in secret without public awareness or consultation and included a 99 year lease term

4) The deal allowed for provisions in the contract giving the private Consortium the ability to charge any toll price

5) The highway being worth far more than the amount signed

 

Business Deal Gone Wrong

Critics biggest concern on the privatization of the highway, had been the 99 year lease that was signed for a measly $3.1 billion. And one of Ontario’s direct fiscal woes stemmed from what the Harris PC’s had done with the $3.1 billion in funds that were raised.

As the transaction of the lease had taken place between the provincial government and between a joint Consortium of Canadian, Spanish, and Australian interests, the $3.1 billion in raised money had been placed into general reserves.

As a direct result of this, the Harris PC’s had been able to effectively claim, that they had balanced the budget after just four years in power and after the fiscally plagued administration left behind during the recession years of Rae’s NDP.

This is documented below from the Ontario Budget 1999-2000 and 2000-01

 

This was also followed by the following:

 

And also, the Harris PC’s touted claims of reductions in the budget deficit were somewhat misleading. In the Budget’s conclusion’s, it stated the following

 

Of course, critics pointed out that the “balanced budget” became a mere accounting exercise that held no muscle to back it.

The $3.1 billion deal that the Harris PC’s received in funds did become an exercise of accounting.

The funds raised through the sale of capital investments should not have been used as part of the province’s operating budget as revenues. Rather, it should have been applied against the debt accumulated to build the highway (total figures are indicated above).

This use of accounting was the equivalent of selling the refrigerator in order to pay for the food.

Elements of this accounting were uncovered when the outgoing Ernie Eves administration had left behind a “hidden” $5.6 billion deficit revealed by then Auditor General Erik Peters in 2003.

 

Property Taxes

In 1999, Liberal Transportation critic Joe Cordiano acknowledged that the sole reason for privatizing public assets is in order to convert them into businesses that pay property taxes. He stated that the highway should cease to become a toll road after the capital costs, plus a reasonable profit for the operator are paid.

The Harris PC’s also passed Bill 70 that gave authorization to Transportation Minister Sampson to sell the highway under whatever terms he saw fit with no further review by the legislature

 

The Harris PC’s also voted down Cordiano’s proposed amendment for the provincial auditor to review the deal before it closed.

Cordiano had said,

If [the highway deal] was subjected to review by the legislature and the provincial auditor, then we could examine whether it is a good deal or not. Instead it’s a done deal and no one knows.”

 

 

PC Transportation Minister Sampson said there is no benefit in having the ownership of the 407 revert back to the province in 30 years since by that time it would be due for costly upgrades and reconstruction.

He said, “There is no such thing as a free highway. The reality of roads is that they age just like you and I. You’ve got to have a plan in place to deal with that. That’s the prudent way of looking after the interests of the taxpayer as opposed to saying, 30 years from now I’ll let my son or my daughter worry about it.”

Sampson added,

A 99-year term is needed to ensure the private-sector operators make a reasonable profit and road users are protected from paying exorbitant tolls

 

The deal allowed the province to adjust toll rates if it found motorists were avoiding the highway.

When asked on the subject of property taxes, Sampson said the provincially owned successor companies that resulted from the breakup of Ontario Hydro will make payments in lieu of property taxes but he said these companies would not be a valid comparison to the 407 ETR.

He said,

The competition to the 407 is the 401, the 403, and the {Queen Elizabeth Way}, and those don’t pay property taxes.

(Files from National Post: April 24, 1999)

Secret Contract

In February 2002, the bulk of the “Secret agreement” governing the provincial sale of Highway 407 to a group of private interests had been released. The document titled: Highway 407 Concession and Ground Lease Agreement was made public after a protracted Freedom of Information battle with the highway’s corporate owners. The document revealed most of the company’s rights and obligations under the 1999 deal.

A court action was launched by the 407 ETR in order to prevent the release of crucial sections of the contract that detailed the toll rates that drivers could be charged for using the road, or any traffic volumes the owners should maintain.

407 International appealed to the province’s Divisional Court, that the release of the tolling agreement would put the group at a competitive disadvantage on future toll-road projects and would run against the public interest. Their application was granted.

 

The contract segments did demonstrate that the provincial Tories had insisted on certain clauses that were meant to protect road users and the taxpayer.

Among these were:

  •  A clause forbidding the company to sell information gained from its access to licence plates.
  •  Provisions ensuring the company pays for all Ontario Provincial Police highway patrol costs- except the purchase of the force’s cruisers and other necessary equipment- and that they not employ private security firms in place of the police.
  •  Clear wording on the unfettered right of the government to use the highway corridor, including the roadway’s median, for future transit lines.
  •  Contract allowing the 407 to withhold provincial licenses for non-payment of tolls and permitting the company to enter reciprocal agreements with other jurisdictions to enforce collection on out-of- province motorists.

But the crucial section of the contract- officially called the share purchase and concession and ground lease agreements, dealing with tolling, congestion relief and expansion- were deleted from the document

Also important to note, is that the Harris PC’s had accepted confidentiality clauses in the contract that helped the highway’s owners fight the release of information on the purchase agreement.  (Toronto Star Feb 05, 2002)

The contract also had provisions included that would not allow the provincial government to build an alternative freeway to compete with the 407 structure.

Rising Tolls

When Mike Harris had governed, his government had made promises against excessive toll increases when he said, “tolls can be adjusted by 2 per cent per year plus inflation for the first 15 years. This would mean that tolls could increase by about three cents per kilometre over the first 15 years.”

In April 1999 (before the privatization), about 210,000 drivers per day used the 407, generating about $9-million a month in revenue for the province. (Star: Feb 2, 2002)

By January 2004, the Star reported the extra hike proposed by 407 would be the sixth in 52 months, bringing the price to 13.95 cents a kilometre in peak hours and 13.1 cents a kilometre in off-peak hours.

When Harris had made his promise, it cost 10 cents a kilometre in peak periods, 6 cents a kilometre in off-peak and 3 cents overnight, a category that was eventually removed in 2000. (Star: Jan 2, 2004)

And from 1999 – 2005, the average number of weekday trips on the 407 road grew by 40% even though tolls had risen five times during that period, by a total of 40% – 228 % depending on the time of day. Over this same period, the consumer price index (inflation) had gone up 13.3%.

This undoubtedly had many Ontarians frustrated.

In 2001, a company document leaked to the media last year suggested the sales agreement would allow tolls to be raised without limit should certain annual traffic volumes be met.

In fact this was true, as a spokesperson for the 407 highway even stated that the toll increases would only occur provided that the level of traffic remained steady. The rate would be set on what the market (Ontarians) would be willing to pay for the service.

In the provincial elections of 2003, the McGuinty Liberals had promised to roll back on the Highway 407 toll increases as part of their election promise.

In November 2003, the bond-rating company Standard & Poor (S&P) had even warned the Liberal government that rolling back tolls or restricting toll hikes could cost taxpayers millions of dollars because 407 ETR had what S&P called an ironclad contract protecting its interests against government interference.

S&P recommended the government keep its hands off the tolls altogether and cautioned that even less intrusive measures could threaten 407 ETR’s viability and cost taxpayers hundreds of millions of dollars in compensation to investors.

407 International raised yet another toll hike in February 2004 which prompted the McGuinty Liberals to respond and this initiated a legal battle. An arbitrator had ruled that the government was powerless to stop it. The government did appeal the ruling but it was now the Liberals that were facing criticism over the highway, for failing to keep their election promise they had made to reduce the tolls.

The important lesson here, was that even after a government handed over legal responsibility for a public work or service to a private partner (as Harris’s PC’s had done), the public will continue to hold the government politically responsible if something goes wrong. (Gazette: Feb 6, 2005)

 

When the highway deal was finalized in May 1999,  the Privatization Minister Rob Sampson indicated that tolls would continue to be regulated. He stated, “The travelling public will be happy to know that we have struck this deal with their time and pocketbooks in mind.

Sampson also expressed his “thrill” with the result. He also said, “With sale proceeds of more than $3.1 billion, Ontarians will receive double their investment in Highway 407. This is a great day for all Ontarians.

Whether Ontarians really received the real value of their “investment” is subject to much debate. However what is certain without a shadow of a doubt, is that the group that purchased the lease for the 407 did have a “great day”.

 

Market Valuation of Highway

Political pundits and other contemporary writers also fiercely criticized the Harris PC’s on the amount the highway was sold for. Some dubbed it a ‘firesale’ since tax payers had helped to pay for it ($1.6 billion as indicated above) yet Harris signed a 99-year lease agreement that granted significant control over the highway and its tolls, as well as a restriction under which the government may not build any nearby freeways which might potentially compete with 407 ETR.

The market valuation of the highway was quoted to be several sums higher than the sale price of $3.1 billion. Some independent financial analysts were soon reporting that the highway was worth at least four times its sale price.

This estimate was somewhat confirmed in 2002 when a 6% share in the 407 consortium, originally valued at $45 million, sold for $178 million.

In 2001, an Australian investor, Macquarie Infrastructure Group (investment bank), estimated the value of the road at $6.3 billion, or twice what the government paid. It’s also important to note, that perhaps the Highway was worth twice as much because the private manager at the firm may have felt they would have been able to raise tolls to a point that the market could bear. (Gazette: Feb 6, 2005)

What made things even worse, is that within 9 years, the Consortium had easily paid off the costs it had put in for the highway, and  essentially had a gold mine that would see windfall profits for the next 90 years.

 

In January 2012 when on the subject of the Highway 407 deal, Mike Harris himself stated, “Four consortia bid on the highway. Afterwards, one of the losers came up to me and said it was the best, fairest process he’d ever been involved in. The sale put $3 billion into Ontario’s coffers and led to our being able to avoid very heavy expenditures on the highway. My brother lives at the intersection of 407 and 401 in Georgetown. I was planning to meet him and suggested he take it. He said, no, I refuse to. I’m opposed to it. I said, fine, take the 401, allot another hour of time, it’s your choice.

I was approached by a French consortium to buy all the 400 series highways. I asked them, how can we be sure you’ll put the necessary maintenance and expansion dollars into it? They said, ‘When we own the highway and traffic is moving at 120 km/hr, we make money. When it moves at 60 km/hr, we make little money. And when traffic is dead stopped, we don’t make any money. So who’s going to build the new lanes faster? Furthermore, when you’ve got health and education competing for tax dollars, highways will always lose. We’ll build them, because we make money when cars move, and we don’t when they don’t.’” [Harris did not give the green light to that deal]

 

Hindsight

So, considering just how much of a bad deal the highway 407 was for Ontarians, why was the media, and public opposition unable to mobilize an effective force to counter the contract?

One of the main reasons was that the contract was confidential.  As a result, not many people knew what was being proposed.

The initial perception of the deal was that it was good for Ontario.  It was not until toll prices started rising that the public became concerned (about 6 months after the contract was signed).

 

From a governance perspective, the privatization agreement lacked any control and accountability mechanisms and there was no transparency.

The privatizing of the 407 is an example of “creating policy by contract”. The contract was confidential and so there were no opportunities for anyone to review its terms.

It is argued that Government contracts should not remain confidential since they are intended to serve public interests and must hold up to public debate.

And the impact of the costs from tolling has reduced public appeal (to some degree) of electronic road pricing as a viable transport policy option to reduce congestion, fund public transit, and cover the cost of building highways. This is an unfortunate consequence as a result of the deal.

 

The problem with the highway was not that it was privatized, but rather in the manner in which the Harris PC’s carried the privatization out.

There were other alternatives that could have been considered as well.

In another scenario, the highway could still have remained privatized, yet retained a public minority interest such as in the example of Petrocan.

An alternative to privatization could have been establishing a crown corporation (such as in the LCBO case).

 

Important lessons:

The privatization agreement underscored a strong need for long-term thinking in making policy decisions. Short term priorities drove the privatizing of the 407.

  •  One of the main impacts of the 407 was that it poisoned the public will for the adoption of tolling technology and road pricing. This is seen as a lost opportunity
  •  The conditions of the 99 year lease included non disclosure, confidentiality, and anti competition clauses resulting in significant implications for the general public
  • The privatizing of the highway was strategically carried out before the 1999 election in order to maximize revenue for the pre-election budget, as well as signal its commitment to privatization  to its key constituents.
  • The details of the contract were kept secret until the end having major consequences for effective governance
  • Harris PC’s neglected to notify the general public the highway generated roughly $400 million dollars worth of revenue for business on an annual basis

 

All in all, the sale of the highway presented a hijack of what previous governments had planned, and ultimately did not serve the public interest in the manner it was originally conceived in.

 

 

About Author

Salman

Salman is a analyst with extensive knowledge in the fields of finance, politics, and healthcare. He has dedicated himself to serving the benefits of the community and helping to empower ordinary people on the current events occurring nationally. He has a unique philosophy on how people engage and learn, and he strives to create engaging opportunities for hosting discussions on topics such as this. Salman has graduated from the University of Toronto and has been involved quite significantly with numerous different organizations in the community. He has participated as a leading letter writing campaign advocate with Amnesty International, a member of the executive at the University of Toronto Rotaract division, headed the marketing and innovations department with Students in Free Enterprise, and many more. He has consulted with many individuals on matters of personal finance, health and fitness, landscaping, and more. Salman is an active DIYer (Do-It-Yourselfer) and loves to meet new people all the time, and finds it very rewarding to connect with others on bringing a meaningful positive difference. His comments to all of his readers is, "We build, and we achieve, thus we must build more bridges, and tear down our walls." You may connect with Salman directly on his Twitter: NotASalesman, and his Facebook: Salman D. He thanks you all very much and hopes to hear from you on your thoughts, and experiences. View all posts by Salman →

Comments (4)

  1. I use the 407 on weekends to bypass the toronto mess to reach my cottage near kingston . The toll cost is always painfull for my wallet ,but always saves me a lot of time . I cant wait for the extension to be completed .

  2. Bernard Eastman May 22, 2014 at 10:06 pm

    Very much appreciated article. Lot’s of excellent detail. Would have liked to see any info on current day value of the 407. Lots of my friends have a simmering and continuing rage about Harris 407 give away and the way it is operated even today. A quite, but just below the surface bubbling volcano. Every time Hudak talks about his pet rock from the Hydro fiasco, he should be reminded that Ontario folks don’t even have a pet rock from the sleezy 407 secret deal of his “dad”, “common sense” Mike Harris..
    Goos Work!

  3. Martin Julian csc August 11, 2013 at 3:02 pm

    Dear Salman ,

    Kudos !!!

    This type of investigative journalism has sadly dissappeared .
    Articles based on the actual facts and truth (whatever happened to the truth ? ) about critical , pertinent and relevent issues , not the paraphrasing of press releases without even confirming their validity , which prevails today.

    As George Seldes said “Tell The Truth and Run ”

    Thank you ,

    Martin Julian csc

    Please keep up your quest we … and , our children and , their children need this ..

Leave a Comment

Login to your account

Can't remember your Password ?

Register for this site!