Highway 407 East: Will they still come?

The Ontario Ministry of Transportation has announced its intention to build extend Highway 407 East to its natural terminus in Clarington, where it would like with Highway 35/115. This would achieve the government’s goal of a complete multi-lane divided highway route ringing Toronto. Highway 407 is now a privately operated toll-road, with 90 years left on its 99-year lease and with – thanks to numerous court challenges the McGuinty Government lost – a virtually free rein on setting tolls. For the extension, the issues of ownership, financing, and relations with the current concessionaire, Highway 407 International, will be critical.

My co-author Chandram Mylvaganam and I argued in If you Build It …. that public ownership would have been preferable to the Harris Government’s privatization. The McGuinty Government agrees, but the question now becomes how to run a highway that is half-private and half-public.

The Government’s plans call for private sector construction and financing of the road and the tolling technology. Given current capital markets, could they find private sector bankers willing to put up the necessary billions? The private sector developer-operator is to be compensated by publicly-regulated tolls and a shorter agreement than the 99 year lease 407 International received. The question is whether this would be enough to cover their loans, or whether, under these circumstances, their break-even tolls would differ very much from the current tolls.

Who would likely win the competition for the contract? 407 International must be the favoured competitor because it has the experience designing and maintaining the current road as well as the tolling technology. In addition, Highway 407 East will generate additional traffic on the existing Highway 407 (for example Kawartha cottagers who shift their summer trips from 401 to 407). These construction and network economies of scale should enable 407 International to make the lowest bid. On the other hand, we can imagine other bidders, such as major construction companies and, on the technology side, operators of similar road pricing projects, for example IBM, which played a major role in London and Stockholm. If the technologies are not integrated, the user would be presented with the inefficiency of carrying two different transponders and receiving two bills for a trip using the two different parts of 407.

So the devil is in the details on this one. My bet, at the end of the day, is that 407 International will win the contract to build, design, and operate the Eastern extension, and while their tolls on that portion will be regulated, the fact they are deregulated on the rest of the highway will enable them to make their target rate of return on the Eastern extension.

Sandford

9 comments

  1. You have no idea how thrilled I am to have stumbled across your blog. You are saying a lot of things I have been trying to say for 6 years now. I live in Ajax. I went down to Queen’s Park.

    Minister Wynne was not thrilled to speak to me at all, but I spoke with her Chief of Staff, Dave Penfold. I questioned how they can claim they will have a seamless system, with control over tolls and customer service without the current operators involvement.

    This was Mr. Penfold’s response, “It was announced in 2009 that Ontario is proceeding to build the highway 407E extension and that tolling revenue would come back to the province. With respect to tolling on the extension I did not indicate that we have not thought that far in advance. The government announced on June 8, 2010 that the new extension including the link will be a tolled highway that is owned and controlled by the government. The government will have complete control of toll rates and revenues and for setting customer service standards. The specific regime for the collection is currently under analysis.”

    Well they already started construction out here and I still do not have an answer on how they plan on achieving that.

    I have been saying for 6 years that the issues surrounding the current operator has to be dealt with once and for all.

    Oh yeah and at a meeting in the City of Oshawa it was announced that funding of this extension is not on the books. My immediate reaction was what??? How can they do this? The questions in your article should be demanding further investigation.

    Our group is committed to raising awarness and we need people like you in the know to help. I hope you are willing.

  2. Sorry… one more point. This is just a pet peeve of mine. The McGuinty government did not lose their court challenge. They settled in what was advertised as an amicable settlement.

    I am of the believe they didn’t ask the right questions to begin with. For example, when Transportation Minister Harinder Takhar ordered an investigative review of consumer complaints against the operator of Highway 407, it was done because there are provisions to renegotiate the concessions contract. Unfortunately for us, rather than focusing on customer service as I feel they should have, they were promising “roll back” tolls and made comparisons with toll rates on the New York State Thruway – a half century old pike with relatively little debt – to charge the 407 with “gouging”. Of course the operators could cry poor at that time and whine about their debt load and yada yada yada.

    However, you tell me if this is still the case when on April 17th, 2009, The Toronto Star publishes an article that shows that this highway has profited $8 million for the quarter ending March 31st, 2009 as a reversal report of an initial claim of an $11.9 million loss for the same period. They no longer can claim poor.

    What bothers me even more about this and makes me question things is the fact that our CPP just purchased 10% of Ferrovial’s stake in this highway for 25% more than the initial asking price? Ferrovial was recorded as being in need of selling that stake in the highway. So what’s going on? Why does it seem like I am the only person that feels something is wrong with this? Am I missing something?

    I do not want an all out war with this highway, but I feel the public deserves transparency. There is more that the government can do and it baffles me why they aren’t.

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