Ontario taxpayers paid a much higher price for the privatization of Highway 407 than they imagined. They lost the chance to have a highway virtually for free.
The Mike Harris government turned down an offer by a development consortium to extend the world's only electronic toll highway, which runs across the top of Toronto, all the way to Highway 35/115, east of Oshawa, at no cost.
The offer would have saved the government up to $1.5-billion in construction costs and cut travel times for commuters in the eastern half of the Toronto region, as well as to and from Eastern Ontario.
Instead, according to government sources and confidential documents obtained by The Globe and Mail, the Progressive Conservatives sold off the existing highway to another bidder who was prepared to pay more money up front, money the Tories desperately needed to finance their campaign promises.
The same cabinet ministers who made the decision to turn down a free road are in charge of the government's much-vaunted SuperBuild program, which aims to match $10-billion of public money with private investment to improve the province's infrastructure.
Yet the decision-making process revealed in the 407 sale raises questions about whether the Harris Tories are committed to long-term planning or short-term expediency.
As the Ontario Conservatives approached the fourth year of the Common Sense Revolution, their re-election prospects appeared far from certain.
The Liberals under Dalton McGuinty were ahead in the polls. Although those polls suggested most people believed the Tories were "on the right track" with their program of tax and spending cuts, education reform and tighter welfare rules, voters feared the government had mismanaged health care: firing nurses, angering doctors, ordering hospitals closed and letting services deteriorate. Tory strategists needed to reverse the impression that the government was starving the health sector of money. They were equally anxious to provide a further round of tax cuts as the centrepiece of their Blueprint election-campaign platform.
The solution was to sell off the brand new Highway 407. The electronic-toll expressway had cost the government $1.5-billion to build, with those costs to be recouped through tolls. But selling the road off to a private company, which would then collect the tolls, would bring hundreds of millions of dollars into the treasury -- enough for both a short-term cash injection to health-care funding and for a tax cut -- without jeopardizing the government's deficit-reduction goals.
In October of 1998 the requests for offers went out. Bidders were instructed to consider four options. Option One asked them how much they were willing to pay for the existing road, plus two extensions that they would be required to build. Options Two and Three lengthened the eastern extension of the road, with Option Four taking it all the way to Highway 35/115.
Finance Ministry officials estimated private consortiums would be willing to pay about $2.5-billion under Option One.
A ministry memorandum advised that bids for Options Two, Three and Four would be lower, "as the projected toll revenues may not cover the cost of construction if the highway is extended to its ultimate length." Extending the 407 all the way out to Highway 35/115, according to government estimates, would cost the new owner up to $1.5-billion.
For that reason, Finance Ministry officials expected the Cabinet Committee on Privatization, which would choose the winning bid, to go with Option One.
"If CCOP opts for a privatization scope that extends highway construction farther to the East, and that results in a lower sale price than the overall top bid, CCOP would in effect be making an implicit expenditure decision to invest the difference in highway construction," the memorandum advised.
In other words, accepting a lower bid for a longer highway would mean there would not be money to spend on other things. And Finance Minister Ernie Eves and the Tory campaign strategists planned to spend the Highway 407 profits on health and tax cuts, not new roads.
At auctions, a bid that's completely out of line with what's expected is called an outlier. On March 28 of last year, the day the 407 bids arrived, the government received a doozy of an outlier for the 407. Three consortiums bid to take the 407 off the government's hands. Two of the bids were predictable. They offered between $2.4-billion and $2.8-billion under Option One. If the government decided to go with Option Four, the offers dropped to as low as $1.2-billion.
But a third offer shocked everyone. A consortium led by Woodbridge Co., the holding company for the Thomson family, which owns The Globe and Mail, not only put in the highest bid for Option One -- $2.805 billion -- it was also willing to pay $25-million more for the right to extend the 407 out to Highway 35/115. The Woodbridge consortium was clearly gambling that the revenues from the extended road would be higher than the government predicted, ensuring that the company would make, not lose, money on the extension.
When CCOP met March 30 to choose a winning bid, most participants were certain the Woodbridge bid was a slam dunk. Not only would the government be getting the Highway 407 extension for free, the road would greatly benefit the constituents in the ridings held by Management Board Chairman Chris Hodgson and then social services minister Janet Ecker, two members of the five-member committee.
But when Mr. Eves, the most powerful politician in the Ontario government after Mr. Harris, arrived at the meeting, he insisted that the committee must reject the bid on the extension. (None of the members of the committee, including Mr. Eves, knew the identities of the bidders.)
The other cabinet ministers initially opposed Mr. Eves's decision. Transportation Minister Tony Clement joined Mr. Hodgson, Ms. Ecker and Privatization Minister Rob Sampson in pushing for the extended road, arguing it would greatly ease traffic gridlock in the eastern half of the Greater Toronto Area, while promoting growth and development in satellite cities from Pickering to Clarington.
Mr. Eves countered by pointing out that Woodbridge's Option One bid had a special notation beside it.
Under the complex rules of the competition, if the two top bids in one option were within 5 per cent of each other, and that option was chosen by the committee, the government could invite the two top bidders to bid again. The notation signalled there was another bid within 5 per cent under Option One. Mr. Eves and the rest of cabinet committee therefore knew that choosing Option One could create a bidding war that would maximize the immediate profits from the sale. In essence, Woodbridge and a consortium headed by Grupo Ferrovial, a Spanish construction company, would both have to up their bids if they wanted the highway. The extra money could be used to further increase funding for health care, to finance a second round of tax cuts and to keep the government on track to eliminate its deficit on target.
Faced with an adamant Mr. Eves, who is not only Finance Minister but a close personal friend of the Premier, the other cabinet ministers acquiesed.
The bidding war was ultimately won by the Grupo Ferrovial consortium, which paid $3.1-billion for the existing highway and the extensions to Brock Road and Highway 403.
"The final decision was based solely on the highest price," stated Mr. Sampson the day of the announcement. "We are told it is a tremendous example for other jurisdictions to follow." Shortly after, Mr. Eves brought down a budget that focused on increased funding for health and a new round of tax cuts. The next day Mr. Harris called the election.
All the ministers present at the cabinet meeting, along with officials at Woodbridge, declined to be interviewed for this story.
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