Highway 407’s Unsurprising Next Step

Having co-authored a book about the history of Ontario’s 407 ETR up to 2005 and having watched its evolution since then, I feel obligated to comment on its latest development, the Ontario Government’s announcement yesterday of Highway 407’s Eastern extension. Almost everything about the announcement was predictable, and I will explain why.

Given its battle with the current concessionaire (Highway 407 International) about tolling, the province was expected to retain control of the extension, set service standards, determine tolls, and receive revenues. Given Ontario’s large deficit, the province might have been tempted to do what the Harris Government did, namely auction off the right to toll the highway for a considerable period of time and use the proceeds to pay down this year’s deficit. But having criticized Harris so sharply, even fiscal exigency would not justify the Liberals emulating him.

The consortium selected to build the highway includes the Spanish toll-road company Cintra Concesiones de Infraestructuras, which is the key player in Highway 407 International. While I do not know who the other bidders were, this should come as no surprise. The Government wanted the transponder system on the Eastern extension to be interoperable with that on the rest of the highway, which gave Cintra an advantage. Further, the opening of the Eastern extension will generate some additional traffic for the rest of the highway, which would give Cintra an incentive to make a more attractive bid than the competition.

I note further that, while the government will be making annual payments to the 407 East Development Group General Partnership, as it is called, the project will be financed by BMO and Desjardins. If the Ontario government had financed the project, it would not have counted against Ontario’s debt because the costs will ultimately be recovered through tolls. My guess is that Cintra can now borrow at better terms than the Ontario Government, which is a reversal of the situation in 1995 when Highway 407 started.

Setting tolls on Highway 407 East gives the Ontario Government a chance to shame Highway 407 International by charging less per kilometre, a difference which will be clearly visible on every user’s monthly invoice. Perhaps Highway 407 International will try to justify this by arguing that there is less traffic volume on the Eastern extension. The flaw in that argument is that the concessionaire doesn’t differentiate its tolls by location anywhere on the current highway. On the other hand, if eliminating the deficit is still a priority in 2015, when the extension is to open, the Government might be tempted to set higher tolls to contribute to that objective.

Finally, the last unsurprising aspect of the announcement was the silence from the Opposition. The Liberals’ decision to maintain control and set tolls left no room for criticism from the NDP. The Hudak Conservatives, not wanting to call public attention to the unfortunate legacy of the Harris Government’s 1999 privatization decision, also said nothing.

While every aspect of the latest episode in the Highway 407 saga was entirely predictable, it does at least reflect organizational learning, and that’s always a good thing.

This will be my last post for a few weeks. I will be in Australia giving some lectures in Canberra and Melbourne on my two long-standing research interests, innovation and narrative. Expect me to break radio silence in mid-June.

 

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