Highway 413: What Would Bill Davis Do?

The Ford Government is planning to build a fourth east-west highway in the Greater Toronto Area: the GTA West Corridor (GTAW). It would run parallel to, and north of, the existing highways 401 and 407, starting at Highway 400 to the east and linking to the 401/407 interchange in the west. (Copious details including route maps, environmental impact, and traffic projections can be found at the GTAW website.) The other east-west highway is the Gardiner Expressway, along the lake shore.

The GTAW proposal is controversial and contested. The Wynne Government commissioned the studies but decided against the highway in 2018. Environmentalists are fiercely opposed and in response GTAW’s planners green-washed their website. And opponents, appealing to widespread triskaidekaphobia, have dubbed it Highway 413.

Bill Davis’s story (and my own)

Readers of a certain age will remember Bill Davis, Progressive Conservative Premier of Ontario from 1971 to 1984, widely regarded as the most successful premier of Ontario in the last 50 years. Davis succeeded by being astute, pragmatic, centrist, and responsive to public opinion. Two of his most important transportation policy decisions were to halt construction on the Allen Expressway before it drove a spike into the heart of downtown Toronto (in 1971) and to withdraw support for the federal government’s planned second Toronto airport in Pickering, effectively killing the proposal (in 1975).

Both transportation projects provoked strong community opposition. The second Toronto airport was proposed while the first still had plenty of capacity, hence Davis’s recognition that it wasn’t needed. Personal disclosure: I wrote my doctoral dissertation in Economics about “Pricing and Investment in a Transportation Network: The Case of Toronto Airport.” My benefit-cost analysis showed that increasing capacity at the existing airport, which was technically feasible, was better than having a system of two airports.

Second personal disclosure: One of my professors at Harvard, the renowned decision analysis scholar Howard Raiffa, led a major study that reached the same conclusion regarding Mexico City, namely that it was better to increase capacity at the existing airport (Benito Juarez) than to build a second at either Texcoco or Zumpango, two place names that have remained in my mind for years because they sound so exotic. I discussed our meeting-of-minds in a 2016 obituary for Raiffa.

Highway tolls and usage

In addition to environmental objections to Highway 413, analogous to the Toronto and Mexico City Airports cases, opponents to Highway 413 have argued that Highway 407, a toll road, has excess capacity, and it would better to use this capacity than build an entirely new highway.

The argument is correct from a transportation planning perspective but is made complicated by Highway 407’s status. Highway 407’s users are paying tolls to avoid congestion, so Highway 407 will necessarily have spare capacity in comparison with a typical congested freeway such as Highway 401.

When the Harris Government privatized Highway 407 in 1998, it gave the franchisee ample scope to raise tolls as long as the tolls didn’t lead to traffic reductions (which would trigger financial penalties). Due to consistent population growth in the 905 region, the franchisee has been able to continuously raise tolls. (I discuss the highway’s history and terms of the privatization agreement in my book, co-authored with Chandran Mylvaganam, If You Build It …). As a consequence of toll increases, continued expansion of the highway, and constantly growing traffic, just before the pandemic a 10 percent share in the franchise sold for over $3 billion, implying that the value of the entire franchise was over $30 billion. The franchisee is now a consortium consisting of the Canada Pension Plan Investment Board, which holds a majority interest, and minority partners Cintra, a Spanish infrastructure firm that built the highway, and Montreal-based SNC-Lavallin.

The pandemic has changed the tolling situation because demand for the highway has decreased. The franchisee is now faced with a difficult choice. Because traffic has fallen it can maintain current toll rates and pay penalties to the provincial government or it can reduce tolls and avoid penalties. While the decision depends on the price-elasticity of demand for the highway, my guess is that the franchisee would prefer to maintain current toll rates and wait for traffic to resume when the pandemic ends. There is a large body of economics research that found that prices are sticky downwards. This would likely be the case for a high-profile regulated toll road. A third alternative would be for the franchisee to act in the political arena by appealing to the government to waive the penalties.

Another implication of the pandemic is that the valuation of Highway 407 has decreased from the lofty $30 billion plus to a new valuation that depends on whether after the pandemic people continue to work at home more, hence permanently reducing usage of the highway.

We could imagine that if the Ontario Government wanted to increase utilization of Highway 407, it could buy out the franchisee and then eliminate tolls. If, in a worst-case scenario for the franchisee the value of their franchise is reduced to $15 billion as a result of pandemic-induced changes in travel patterns, it would still cost the government substantially more to buy it out than to build Highway 413. While the GTAW Corridor planners haven’t provided cost estimates, opponents of the highway estimate its cost at $6 to $10 billion.

Towards a Solution

The fact that Highway 407 is controlled by a franchisee holding a contract that was upheld by the courts and that extends for 80 years into the future complicates any role it can play in solving the GTA’s traffic problems. But the decline in traffic due to the pandemic has reduced the value of the franchise and weakened the franchisee’s bargaining position. If the Government of Ontario and the franchisees (CPPIB, Cintra, Lavallin) were to sit down at the virtual bargaining table, accompanied by the federal and municipal governments, they should be able to come up with a solution that facilitates greater utilization of Highway 407 (a lane reserved for trucks perhaps) and that postpones or even avoids the construction of Highway 413.

Bill Davis is a nonagenarian and Howard Raiffa has passed on, but if we can apply the spirit of creativity, pragmatism, and public responsiveness both exhibited, we should be able to come up with a better option than another highway in the GTA.

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