For Ontario taxpayers, Highway 407 is a wound that continues to throb. In her new book, The Sport and Prey of Capitalists: How the Rich are stealing Canada’s Public Wealth, Linda McQuaig looks at the dogma of privatization. In this chapter, McQuaig — who recently argued that if Premier Doug Ford is cancelling contracts, then maybe he should rip up the 407 sale — examines how the sale of the toll road came about, and what’s happened since.

Privatization has become the economic dogma of our times — a doctrine that is rarely questioned, but has cost us dearly. To see the costs, we need look no farther than Highway 407. Its sale in 1999 was the biggest privatization in Canadian history and almost certainly the worst deal of the century.

Although controversial at the time, its critics couldn’t have imagined just how much it would end up costing Ontarians, and how much more it will continue to cost us until the deal expires in 2098 — just two years before the next century when anyone now reading these words will almost certainly be dead or at least too old to celebrate.

Certainly, it illustrates why we should be wary of governments leading us further down the privatization path.

The 407 sale was the brainchild of Mike Harris’s Conservative government, which swept to power in the 1995 Ontario election pledging a “Common Sense Revolution” that would cut taxes, balance the budget and reduce the size of government. The government set up a Privatization Secretariat, and filled it with recruits from the business world who were full of vim and vigour about the superiority of the private sector. There was similar enthusiasm for privatization in Bay Street brokerage houses, as well as law and accounting firms, whose services would be needed to carry out the deals.

The 407 had been developed in the early ’90s by the NDP government of Bob Rae for the purpose of relieving traffic congestion in the rapidly growing urban area around Toronto. It had been designed as a toll road, but the Rae government promised the tolls would be used exclusively to cover the highway’s construction costs and would be lifted once those costs were covered, likely after about 30 years.

When the Harris government announced in 1998 that it was considering selling the 407, critics immediately charged that a private owner would raise the tolls — a charge that was dismissed by the government. Tony Clement, minister of transportation, and Rob Sampson, minister for privatization, insisted that, on the contrary, tolls would likely decrease because the private owner would be keen to attract more users.

One of the important issues considered by the Harris cabinet was the duration of the deal.

Typical privatization deals involved 30-year leases. But the Privatization Secretariat instead suggested lease periods of 55, 99 or even 199 years, and asked the prospective buyers to make non-binding bids on these various options. When the longer leases produced higher bids, the secretariat used this to push the cabinet towards a longer lease.

The difference between the bids for a 30-year lease and bids for a 99-year lease amounted to $100 million — not a large amount to cover a period of almost 70 years. Of course, making a commitment for an extra 70 years would tie the hands of future governments and future generations. But that apparently counted for little in the minds of Harris cabinet members, compared to the benefit of receiving an extra $100 million that could be put towards pre-election deficit reduction.

So the cabinet opted for a 99-year lease, thereby “handing over a lucrative franchise to toll the Highway 407 corridor for almost a century,” note academics Chandan Mylvaganam and Stanford Borins in their detailed study of the deal, published by University of Toronto Press, titled If You Build It … Business, Government and Ontario’s Electronic Toll Highway.

Although Ontario had never privatized a highway before, the Harris government proceeded at full speed. After only one day of public hearings, it passed legislation facilitating the privatization in December 1998. A few months later, having considered offers from three major consortia, it selected the highest bid — $3.107 billion from 407 International Corp., which was owned by a subsidiary of the giant Spanish construction firm Grupo Ferrovial, with a passive interest held by the Quebec-based engineering firm SNC-Lavalin, which has received extensive media attention recently in connection with the Ottawa political scandal.

Since taxpayers had already spent $1.5 billion building the 407, the government declared it had scored a “profit” of $1.6 billion in offloading it to the Spanish company. The deal closed May 5 — the same day an election was called, with the proceeds from the highway sale enabling Harris to head into the campaign boasting a considerably smaller deficit than expected — as well as delivering a $200 cash rebate to every Ontario taxpayer.

Just how bad a deal the government had struck first became evident two years later when SNC-Lavalin sold part of its 407 holding in a transaction which showed that the value of the highway had already more than doubled to $6.3 billion — a fraction of what it would later be worth.

At least part of the reason for the quick and dramatic jump in the highway’s value was that it had been operational for less than two years at the time of the sale and the number of users was still growing. Mylvaganam and Borins argue that if the government had waited at least another couple of years, the true profit potential of the highway in the explosively growing Toronto market would have been easier to establish, and it would have commanded a considerably higher price. But that didn’t fit the Harris government’s electoral needs.

Astonishingly, the Harris team failed to provide even minimal safeguards against future toll hikes by the private owner. The only protection built into the deal involved traffic volume; as long as the highway attracted a certain number of drivers (thereby fulfilling its function as a relief route), the new owners had total freedom to raise the tolls to whatever level they chose!

Sampson, the privatization minister, reflected the Harris government’s blind faith in the marketplace when he assured the public that “tolls would not skyrocket because new owners need drivers if they are to pay off debts. The limit is what the market is prepared to pay and that’s a realistic limit.”

Sampson had evidently reached this comforting conclusion based on his understanding of how free markets work. It apparently hadn’t occurred to him, or to the others inside the Harris government, that the 407 wasn’t a free market; it was a monopoly.

If there had been other similar roads for drivers to choose from — in other words, if it hadn’t been a monopoly situation — the new 407 owner would indeed have had to keep his tolls down in order to compete. But there were no other such roads. That was why the 407 was built in the first place, and why it was so valuable.

David Turnbull, who had become minister of transportation, had the audacity to suggest that motorists had market power and if they didn’t like the higher tolls, they should stop using the 407 — even though they had paid to build it through their taxes!

The reality was that the new 407 owners could keep raising the toll rates without losing customers because there was an enormous hunger for a relief route in the Greater Toronto Area, which had already reached five million people by the time of the sale. The government had just handed over to a private foreign company the power to effectively extort significant amounts of money from Ontarians who needed the highway to lessen gruelling, multi-hour daily commutes.

While the Harris government had predicted that the 407 tolls wouldn’t rise by more than 30 per cent over 15 years, in reality, the tolls rose by more than 300 per cent over that period, pushing the approximate rush-hour cost of driving from Burlington to Pickering to more than $40.

Also swept away in the privatization deal was the original promise that the tolls would go exclusively to building the highway and would be removed when those costs were covered. Since that pledge had been made by the Rae government, it was easily discarded by the Harris Common-Sensers — even though it was, when you think about it, the epitome of common sense. It must have been obvious to the Harris cabinet that, even if this sale would help them get re-elected, it was a very bad long-term deal for Ontario taxpayers, who had already paid $1.5 billion to construct the highway and now would be obliged to pay to drive on it for the rest of their lives.

In 2014, the 407 International reported annual revenue approaching $900 million — almost $1 billion in a single year! — money straight out of the pockets of Ontarians.

The sale of the 407 also created needless court battles and hassles for thousands of drivers. That’s because the Harris government had agreed to deny licence plate renewals on cars owned by drivers who failed to pay fines for unpaid tolls. Thus, the sweeping power to deny citizens the right to drive their vehicles — not just on the 407 but on any road — was effectively handed over to a private company.

Amazingly, by February 2000, only eight months after the completion of the highway sale, fully 80,000 Ontario drivers had been denied plate renewals as a result of unpaid fines, and a further 110,000 were listed as having delinquent accounts leading to the same punishment. This massive inconvenience — not to mention employment jeopardy for those needing a car to get to work — was a direct result of the privatization.

One of the reasons that there were so many plate denials was that the new owner frequently made billing errors and yet had few staff handling the phones to deal with complaints. It also practised something called “bill suppression” — if initial bills weren’t paid, the company stopped sending follow-ups but continued to keep track of penalties and interest charges. Then, years later, it demanded payment of stunningly large overdue accounts. In 2014, 45-year-old engineer Andrew Bird received a bill for $43,000 from 407 International when he returned to Ontario after living in Alberta for six years.

The extent of the financial problems created by the 407 is evident in the fact that the company eventually agreed to pay $8 million in 2016 in a class-action suit brought by Ontario drivers, after the Supreme Court of Canada ruled the company couldn’t pursue collection from people who had declared bankruptcy.

All this helped turn 407 tolls into a contentious issue in the October 2003 election, with Dalton McGuinty’s Liberals vowing to “stop the 407 rip-off” by rolling back what were reported to be the world’s highest road tolls.

But after he was elected premier, McGuinty discovered this was more difficult than his campaign slogan suggested; the Harris government had signed a deal with ironclad terms — favouring the foreign company! When the company thumbed its nose at the new government by announcing a hike in tolls, not a rollback, McGuinty decided to take them to court.

That was the beginning of two years of failed litigation. Finally, in 2006, an embarrassed McGuinty government announced it was abandoning its legal battle and acknowledged that the company had the power to set the tolls it wanted and to insist that the government deny plate renewals to delinquent accounts. It was a complete victory for the private owner.

Given all this, it is absurd to merely call the Harris government’s sale of the 407 nothing stronger than a bad deal; it was an unconscionably bad deal. And it’s more than just a question of hindsight. Clearly, the premier sold the highway for a fraction of what it is worth, which is a fraction of what it will be worth in a generation (or two or three), when it will still be in private hands.

It is outrageous that Harris set the lease for 99 years — in order to score an extra $100 million for pre-election deficit reduction — when a 30-year lease would have been far less costly for Ontarians.

The sheer amount of money the Harris government gave up is astonishing. Recent estimates put the value of the 407 today at a staggering $30 billion. Ferrovial estimates that, by 2026, the highway will be worth $45 billion. These mega-billion-dollar price tags reflect how much revenue is expected to be collected — in other words, how much Ontarians are going to pay for the privilege of driving on this road over the coming decades.

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In a 2017 note to investors, the Canadian Imperial Bank of Commerce described the 407 as a “cash cow,” just on the basis of the returns it was producing for then minority shareholder SNC-Lavalin. The CIBC pointed to the population projections for the GTA, which is expected to expand to 9.6 million people by 2041 — when we won’t even be halfway through the 407 lease! As a CIBC analyst commented in the letter to investors: “… we note that 407 International still has flexibility to increase tolls for 81 years.”

Flexibility indeed! Mike Harris may have fashioned himself “the tax cutter” before he got out of town, but he left Ontarians at the mercy of a foreign company bent on charging them ever-higher tolls.

Harris should have at least insisted that Ontario have a minority stake in the consortium. This would have allowed the province to share in the profits — as SNC-Lavalin did from the beginning.

With its 16 per cent stake, SNC-Lavalin reaped enormous profits, as the following language from a National Bank analyst in 2017 reveals: “407 continues to be a value-generating monster for SNC.” [italics added] The Canadian Public Pension Investment Board (CPPIB) also bought a 10 per cent interest in 407 International in 2010, and later increased that stake to 40 per cent, and then to 50.01 per cent in August 2019, when it purchased shares from SNC-Lavalin.

Since the CPPIB is the investment arm of Canada’s public pension system, this means that pensioners have earned profits from the 407. But if the goal is to strengthen pensions for Canadian workers, there are much simpler, cheaper, more equitable ways to do this than to dramatically overcharge ourselves for driving on our own highways.

But there’s a more fundamental problem. The real travesty here is that the Harris government rejected the better option of retaining public ownership — for reasons that seem largely ideological. Had the 407 remained publicly owned, the highway would have — if not by now at least soon — become part of the toll-free system of Ontario roads, saving Ontarians a great deal of money in the years to come.

Or the electorate could have decided to keep the tolls in place, and use them as a large and reliable source of revenue for the province — a “revenue-generating monster,” if you will — with that revenue dedicated to a specific purpose such as funding public transit.

By selling the 407, the Harris government has denied Ontarians decision-making power over some key questions about how we will live together — such as how highways will fit into our plans to fight climate change, and whether it’s fair that low-income individuals can’t afford to drive on less congested roads, even though those roads have been constructed on public land and largely paid for with public funds. Having a privately owned highway smack in the middle of the most populous section of our country is a problem that limits our democratic options.

That limitation will only become more problematic as the Toronto-area population swells over the next 80 years, and we’re faced with environmental and transportation problems we can’t even imagine at this point.

Mylvaganam and Borins also argue that the sale of the 407 amounted to an important missed opportunity since the technology used for electronic toll collection on the 407 was the most advanced of its kind in the world. Therefore, they note, public ownership of the 407 could have been used as the basis for developing Canadian expertise in that technology, which is likely to be increasingly in demand as the world looks for ways to discourage the use of cars.

And it was the Ontario government, under Bob Rae, that took the initiative in developing that more advanced technology in 1994 as part of the building of the 407.

At that time, there were already electronic tolling systems that could effectively track regular highway users by attaching transponders to their vehicles. But Ontario also wanted to be able to apply tolls to occasional users who lacked transponders. To meet those requirements, a collaboration of Bell Canada, Bell Sygma and Hughes Aircraft developed a new technology involving video-imaging of licence plates on moving vehicles.

If an Ontario Crown corporation had owned and operated the 407, with the advanced electronic tolling system developed specifically for it, it would have been well positioned to market that technology and Canadian expertise to other countries developing highway projects.

“Highway 407 could have therefore been used as a springboard to create a Canadian presence of global significance in state-of-the-art highway and transportation development,” argue Mylvanam and Borins.

Instead, that opportunity has been seized by Cintra de Concesiones de Infraestructuras de Transporte, the subsidiary of Spanish infrastructure giant Ferrovial. Certainly Cintra has built on the expertise it has acquired operating the 407.

As Cintra’s website points out, the 407 was the company’s first venture into North American highways. Since then, it’s been awarded seven more major highway contracts in North America and now claims a global investment in roadway improvements worth more than $24 billion.

It’s sad to imagine what prospects there might have been for Ontario — and Ontario workers — if the Harris government hadn’t been so hell-bent on privatizing one of Ontario’s major arteries. This missed opportunity only adds an additional sting to the weighty financial burden Ontarians face in the coming decades as a result of the 407 sale — amounting to literally billions of dollars in tolls to be paid before the century is done.

Privatization has become a pervasive and destructive force in Canadian politics, stealing our national wealth and stripping us of control over our lives. It also represents a sharp departure from Canada’s strong tradition of public enterprise.

For the first century after Confederation, Canadians collectively created significant public enterprises and public programs that helped transform this vast stretch of land into a functioning and successful nation — including power plants, a national railway, a public broadcaster, a nationwide postal service, coast-to-coast transportation infrastructure, strong public health care and education systems, as well as a publicly owned pharmaceutical company that pioneered medical breakthroughs. Many of these key national projects only came into being following hard-fought battles that pitted the public against a narrow set of financial interests.

After fighting to put these public enterprises and programs in place, Canadians have spent the last few decades downsizing them or selling them off to private investors. After more than a century as nation builders, we’ve spent recent decades as dismantlers or vendors of our ambitious collective undertakings.

All this cutting and privatizing has far-reaching consequences. It diminishes our collective power to own and control key aspects of our economy, our country and our lives, thereby shrinking our democratic capacity as a nation.

These sweeping changes have been made under the illusion that we’re better off if we leave our economy and our lives in the hands of the private marketplace. Another influential but false notion has been that we can no longer afford things we managed to afford decades ago — even though we are vastly richer today as a country.

In reality, we’ve made these changes because of the pressure exerted by powerful financial interests keen to take over lucrative parts of our public domain so they can own them and milk them for profits.

Of course, this is hardly unique to Canada. The push towards privatization started in Britain and the United States several decades ago, and has had major impacts on both those nations.

But its impact has been particularly profound in Canada — a country where public enterprise has played an especially important role, although one that has been largely ignored as we’ve succumbed to the dogma that the market always does things better.

Correction: A previous version of this story said the year 2098 is just two years before the next “millennium.” We have issued a correction to say “century.”

The Sport and Prey of Capitalists by Excerpt fromby Linda McQuaig ⓒ2019. All rights reserved. Published by Dundurn Press Limited.

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