Transport Report: Canada on the move
It has often been said that Canada has been reticent in adopting
the practice of privatization and public-private partnerships.
Looking back at the accomplishments of the past decade, however,
particularly in the transportation sector, Canada has accumulated
an impressive list of trend-setting initiatives. And all
indications point toward the acceleration of this trend.
Canada is a vast country, and as such, transportation has always been a central concern for governments at all levels. Moving people and goods across the country was, and still is, a key ingredient of economic prosperity.
Transportation investments were typically made to provide essential services, which were critical for economic development, and to achieve public policy objectives. They were also made to ensure government ownership of key monopoly services. Prevailing economic and political wisdom at the time these investments were made suggested that they could not be economically provided by non-public means.
However, several governments, both federal and provincial, have reconsidered their roles as owners of transportation assets and infrastructure. The fiscal situation has severely rationed new capital investment spending and the need for new infrastructure has forced governments to explore opportunities to sell-off non-core assets and to identify innovative ways to include, or partner with, the private sector in order to improve services. Nowhere is this trend more prevalent than in the transportation sector.
Selling-off assets
Over the past 10 years, transportation privatization has occurred in a wide variety of forms. The wide range of options available to governments to inject private sector perspective and capital into formerly state-owned activities suggests a continuum of alternatives, rather than a list of discrete methodologies.
The most commonly observed form of privatization around the world is the outright sale of government enterprise to the private sector. Typically, the privatization of state-owned corporations are undertaken in industries where private sector competitors are already present. Canada is no exception to this rule.
Air Canada
Like most international airlines, Air Canada has had to renew its fleets in order to remain competitive and to provide passengers with safe, comfortable and convenient service. During the 1980s, the advent of increased air competition also led to large aircraft acquisition programs. These initiatives required injections of equity from the Canadian government to maintain reasonable capital structure. As the federal government budget came under increasing pressure, Air Canada was among the first government owned assets identified for privatization.
Canadian National Railway
Similarly, in 1995, the Canadian Government privatized Canadian National Rail through a public flotation of C$2.3 billion. The CN rail sale occurred against a background of rail deregulation. Record losses by both Canadian National and Canadian Pacific precipitated merger discussions, which led to an unsuccessful offer by CP Rail to purchase CN eastern lines.
The government also deregulated the sector and phased in liberalization of the regulation of grain transportation. These initiatives enabled the government to position CN Rail to compete with successful US rail companies, which had responded to deregulation by reducing costs and increasing revenues.
Commercialization
Where governments view the ?outright sale? privatization option as politically unacceptable, or where other pressures have forced governments to pursue other options, Canadian governments have successfully ?commercialized? some of their transportation activities through various avenues of public-private partnerships. The goal of commercialization, like privatization, is to structure a public enterprise in a manner that is consistent with and encourages business practices ? notably full-cost recovery.
NAV Canada
For instance, in October 1996, the Government of Canada closed the sale of the country's Air Navigation System to a new private sector operator, composed of major airlines, employees and the government (NAV Canada). This transaction represented the first ever commercialization of an air traffic control system in the world.
NAV Canada operates as a cost recovery entity, which cannot make corporate distributions, including dividends ? commonly referred to in Canada as a ?non-for-profit? corporation. The new entity provides air traffic control services in Canada, the second largest in the world, and includes some of the busiest air traffic lanes across the North Atlantic.
Canadian Airport Authorities
At the same time that the Government of Canada was commercializing the air navigation system, it also initiated the commercialization of major Canadian airports. Accordingly, the government commercialized the country's largest airports, including the country's busiest ? Toronto's Lester B Pearson International Airport ? and the airport in Ottawa, the nation's capital. These actions followed the successful commercialization of airports in Vancouver, Calgary, Edmonton and Montreal.
These airports link the country coast to coast as well as internationally, and are considered essential to Canada's domestic prosperity and international competitiveness.
The federal government transferred the airports operated to Canadian airport authorities under new, enhanced accountability principles.
New private transportation infrastructure
In addition to divesting of existing assets, the federal government and increasingly, provincial governments have worked closely with the private sector to build new transportation infrastructure in partnership.
Nova Scotia Highway 104
For example, the Province of Nova Scotia identified Highway 104 as a high priority transportation project, requiring improvement to the existing highway. However, the fiscal position of the Nova Scotia government required consideration of an innovative solution to the construction requirement, as there was insufficient capital available to complete the highway and the construction of a new alignment
In other words, the Nova Scotia government sought the construction of the highway in advance of its won ability to fund its construction. To do so, the government created a non-governmental corporation to contract for project debt and to undertake the partnership with the private sector under a design, build, finance and operate agreement.
Confederation Bridge Project
The Government of Canada is constitutionally obliged to provide the Province of Prince Edward Island (PEI) with ?continuous communication? with mainland Canada. In May 1997, construction was completed on a 13-kilometre bridge connecting PEI with New Brunswick. The project has resulted in one of the longest continuous water spanning bridges in the world.
Before the construction of the Confederation Bridge, the Canadian Government funded a year-round ferry, in fulfillment of its constitutional obligation. The ferry services experienced escalating operating costs and were subject to periodic disruptions because of adverse weather conditions and peak season demands.
Using an innovative public-private arrangement, the federal government granted an operating concession for the bridge for a 35-year term. The foundation of the project financing for the Confederation Bridge was the commitment by the federal government to make an annual subsidy payment for the 35-year concession. This annual subsidy, indexed for inflation, would service the repayment obligation for the bonds issued to finance the original construction.
Highway 407
Highway 407 is the world's first fully electronic, open-access toll highway. The project was undertaken to relieve traffic congestion in along the northern periphery of the Greater Toronto area, Canada's largest growing region.
In 1993, the Ontario Transportation Capital Corporation, a Crown agency, was established for the purpose of overseeing the design, construction, operation, and financing of Highway 407. In 1998, the Government of Ontario announced its intention to sell the OTCC and privatize Highway 407 with an obligation to construct extensions to the Highway both to the east and to the west under a 99-year concession.
In May 1999, SNC-Lavalin, Cintra Concesiones de Infraestructuras de Transporte and Capital d'Amerique CDPQ (a subsidiary of Caisse de depot et de placement du Quebec) purchased Highway 407 for C$3.1 billion ? the largest privatization in Canadian history.
New initiatives
While the federal and provincial governments have made significant progress towards meeting their deficit reduction targets, the pressure to further reduce the scope of their activities and continue to repay accumulated debt is set to continue for quite some time. The perception that governments were undertaking activities better left to the private sector translated into a wide variety of privatization initiatives, which continue today.
Recent initiatives announced by various governments' point toward an acceleration of public-private partnership initiatives. For instance, the Quebec government for the first time has indicated clearly the need for the private sector to play an integral role in building new transportation infrastructure. In releasing its transportation plan for Montreal, Canada's second largest city, the provincial Minister of Transportation has identified four specific road and rail projects to be undertaken under public-private partnership arrangements.
In addition, in a report commissioned by the federal, provincial and municipal governments on Toronto's waterfront development, the Task Force recommends the adoption of a series of public-private partnerships. The revitalization of Toronto's Waterfront has implications for a wide area with respect to transportation. The expansion of commuter train and subway facilities at the intermodal Union Station is regarded as a critical element in the future development of the downtown core. In addition, the federal Minister of Transport is studying the Light Rail Transit link from the intermodal Union Station to Pearson International Airport. The transportation infrastructure costs associated with the waterfront development are estimated to be in the order of $2 billion.
Whatever means are used, the trend is clear ? transportation infrastructure, with its requisite large-scale capital investment and often subsidized operating environment, will continue to be a clear target for public-private partnerships as Canadian governments are forced to dealing with limited operating and capital budgets and searching for new sources of revenues.
It is evident, therefore, that the favorable government attitude toward the privatization of transportation assets and infrastructure will continue for quite some time. Governments are generally willing to work more closely with private sector entities and have begun to experiment with new private sector partnerships.
Canada is a vast country, and as such, transportation has always been a central concern for governments at all levels. Moving people and goods across the country was, and still is, a key ingredient of economic prosperity.
Transportation investments were typically made to provide essential services, which were critical for economic development, and to achieve public policy objectives. They were also made to ensure government ownership of key monopoly services. Prevailing economic and political wisdom at the time these investments were made suggested that they could not be economically provided by non-public means.
However, several governments, both federal and provincial, have reconsidered their roles as owners of transportation assets and infrastructure. The fiscal situation has severely rationed new capital investment spending and the need for new infrastructure has forced governments to explore opportunities to sell-off non-core assets and to identify innovative ways to include, or partner with, the private sector in order to improve services. Nowhere is this trend more prevalent than in the transportation sector.
Selling-off assets
Over the past 10 years, transportation privatization has occurred in a wide variety of forms. The wide range of options available to governments to inject private sector perspective and capital into formerly state-owned activities suggests a continuum of alternatives, rather than a list of discrete methodologies.
The most commonly observed form of privatization around the world is the outright sale of government enterprise to the private sector. Typically, the privatization of state-owned corporations are undertaken in industries where private sector competitors are already present. Canada is no exception to this rule.
Air Canada
Like most international airlines, Air Canada has had to renew its fleets in order to remain competitive and to provide passengers with safe, comfortable and convenient service. During the 1980s, the advent of increased air competition also led to large aircraft acquisition programs. These initiatives required injections of equity from the Canadian government to maintain reasonable capital structure. As the federal government budget came under increasing pressure, Air Canada was among the first government owned assets identified for privatization.
Canadian National Railway
Similarly, in 1995, the Canadian Government privatized Canadian National Rail through a public flotation of C$2.3 billion. The CN rail sale occurred against a background of rail deregulation. Record losses by both Canadian National and Canadian Pacific precipitated merger discussions, which led to an unsuccessful offer by CP Rail to purchase CN eastern lines.
The government also deregulated the sector and phased in liberalization of the regulation of grain transportation. These initiatives enabled the government to position CN Rail to compete with successful US rail companies, which had responded to deregulation by reducing costs and increasing revenues.
Commercialization
Where governments view the ?outright sale? privatization option as politically unacceptable, or where other pressures have forced governments to pursue other options, Canadian governments have successfully ?commercialized? some of their transportation activities through various avenues of public-private partnerships. The goal of commercialization, like privatization, is to structure a public enterprise in a manner that is consistent with and encourages business practices ? notably full-cost recovery.
NAV Canada
For instance, in October 1996, the Government of Canada closed the sale of the country's Air Navigation System to a new private sector operator, composed of major airlines, employees and the government (NAV Canada). This transaction represented the first ever commercialization of an air traffic control system in the world.
NAV Canada operates as a cost recovery entity, which cannot make corporate distributions, including dividends ? commonly referred to in Canada as a ?non-for-profit? corporation. The new entity provides air traffic control services in Canada, the second largest in the world, and includes some of the busiest air traffic lanes across the North Atlantic.
Canadian Airport Authorities
At the same time that the Government of Canada was commercializing the air navigation system, it also initiated the commercialization of major Canadian airports. Accordingly, the government commercialized the country's largest airports, including the country's busiest ? Toronto's Lester B Pearson International Airport ? and the airport in Ottawa, the nation's capital. These actions followed the successful commercialization of airports in Vancouver, Calgary, Edmonton and Montreal.
These airports link the country coast to coast as well as internationally, and are considered essential to Canada's domestic prosperity and international competitiveness.
The federal government transferred the airports operated to Canadian airport authorities under new, enhanced accountability principles.
New private transportation infrastructure
In addition to divesting of existing assets, the federal government and increasingly, provincial governments have worked closely with the private sector to build new transportation infrastructure in partnership.
Nova Scotia Highway 104
For example, the Province of Nova Scotia identified Highway 104 as a high priority transportation project, requiring improvement to the existing highway. However, the fiscal position of the Nova Scotia government required consideration of an innovative solution to the construction requirement, as there was insufficient capital available to complete the highway and the construction of a new alignment
In other words, the Nova Scotia government sought the construction of the highway in advance of its won ability to fund its construction. To do so, the government created a non-governmental corporation to contract for project debt and to undertake the partnership with the private sector under a design, build, finance and operate agreement.
Confederation Bridge Project
The Government of Canada is constitutionally obliged to provide the Province of Prince Edward Island (PEI) with ?continuous communication? with mainland Canada. In May 1997, construction was completed on a 13-kilometre bridge connecting PEI with New Brunswick. The project has resulted in one of the longest continuous water spanning bridges in the world.
Before the construction of the Confederation Bridge, the Canadian Government funded a year-round ferry, in fulfillment of its constitutional obligation. The ferry services experienced escalating operating costs and were subject to periodic disruptions because of adverse weather conditions and peak season demands.
Using an innovative public-private arrangement, the federal government granted an operating concession for the bridge for a 35-year term. The foundation of the project financing for the Confederation Bridge was the commitment by the federal government to make an annual subsidy payment for the 35-year concession. This annual subsidy, indexed for inflation, would service the repayment obligation for the bonds issued to finance the original construction.
Highway 407
Highway 407 is the world's first fully electronic, open-access toll highway. The project was undertaken to relieve traffic congestion in along the northern periphery of the Greater Toronto area, Canada's largest growing region.
In 1993, the Ontario Transportation Capital Corporation, a Crown agency, was established for the purpose of overseeing the design, construction, operation, and financing of Highway 407. In 1998, the Government of Ontario announced its intention to sell the OTCC and privatize Highway 407 with an obligation to construct extensions to the Highway both to the east and to the west under a 99-year concession.
In May 1999, SNC-Lavalin, Cintra Concesiones de Infraestructuras de Transporte and Capital d'Amerique CDPQ (a subsidiary of Caisse de depot et de placement du Quebec) purchased Highway 407 for C$3.1 billion ? the largest privatization in Canadian history.
New initiatives
While the federal and provincial governments have made significant progress towards meeting their deficit reduction targets, the pressure to further reduce the scope of their activities and continue to repay accumulated debt is set to continue for quite some time. The perception that governments were undertaking activities better left to the private sector translated into a wide variety of privatization initiatives, which continue today.
Recent initiatives announced by various governments' point toward an acceleration of public-private partnership initiatives. For instance, the Quebec government for the first time has indicated clearly the need for the private sector to play an integral role in building new transportation infrastructure. In releasing its transportation plan for Montreal, Canada's second largest city, the provincial Minister of Transportation has identified four specific road and rail projects to be undertaken under public-private partnership arrangements.
In addition, in a report commissioned by the federal, provincial and municipal governments on Toronto's waterfront development, the Task Force recommends the adoption of a series of public-private partnerships. The revitalization of Toronto's Waterfront has implications for a wide area with respect to transportation. The expansion of commuter train and subway facilities at the intermodal Union Station is regarded as a critical element in the future development of the downtown core. In addition, the federal Minister of Transport is studying the Light Rail Transit link from the intermodal Union Station to Pearson International Airport. The transportation infrastructure costs associated with the waterfront development are estimated to be in the order of $2 billion.
Whatever means are used, the trend is clear ? transportation infrastructure, with its requisite large-scale capital investment and often subsidized operating environment, will continue to be a clear target for public-private partnerships as Canadian governments are forced to dealing with limited operating and capital budgets and searching for new sources of revenues.
It is evident, therefore, that the favorable government attitude toward the privatization of transportation assets and infrastructure will continue for quite some time. Governments are generally willing to work more closely with private sector entities and have begun to experiment with new private sector partnerships.
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.