Tuesday, October 30, 2007

Sale and Leaseback of federal bldgs a bad deal for Canadians.

This is from the Harper Index. This is typical of what the Harper govt., helping its friends profit at the expense of the public. Only the unions that are directly impacted by the policy seem to show much interest in the matter. Muckraking journalists do not seem to pay much attention.

Sale / leaseback of federal buildings a bad deal for Canadians - PSAC president

Government "shedding" federal buildings while banks benefit from sell-off; land claims talks save taxpayers millions.

by John Gordon

OTTAWA, October 29, 2007: The Harper government's recent Throne Speech committed to ensuring that Canada has a modern infrastructure based on a foundation of sound fiscal management. Canadians had a preview of what that might mean over the summer when Public Works and Government Services Minister Michael Fortier decided to virtually give away nine government buildings to the private sector.

Research for the Public Service Alliance of Canada (PSAC) undertaken by the economic consulting firm Informetrica showed that the government significantly undervalued its assets, which in the end resulted in close to a $400 million windfall for Larco Investments - the company that won the bid to buy the buildings.

However, a recent ruling by the Federal Court of Canada has changed the equation somewhat. On September 28, the court granted an injunction to stop the sale of two of the buildings located in Vancouver pending the disposition of an aboriginal land claim. Evidently the government forgot that it had an obligation to consult with the Musqueam Band on whose traditional territory the buildings are located.

In response, PSAC has learned, the government has removed the Vancouver properties from the deal entirely. This changes the overall sale price from $1.6 billion to $1.4 billion. And, as a result of withdrawing these properties and maintaining public ownership, Canadian taxpayers will save $10.3 million next year alone.

Despite a lack of consultation with either the public or with Parliament, the government remains intent on selling the remaining seven buildings. In addition, the Harper government is also looking at the possibility of selling or redeveloping 31 additional properties, including Tunney's Pasture, the Pearson Building, the National Library and Public Archives, the Wellington building and 20 others in the Ottawa area, many with heritage and ceremonial significance. This is a bad deal for taxpayers. The decision to sell the remaining seven should be reversed before the final contract is signed.

The government ensured that all of the details of the sale were kept secret from the public


Good fiscal managers aren't known for throwing money away, but that is exactly what this government is doing. Most homeowners would consider it absurd to sell their property and then rent it back in order to pay for a new roof or other routine maintenance. Moving from ownership to being a tenant just doesn't make sense. As James McKellar of the Schulich School of Business said in the Ottawa Citizen (February 1, 2007), "It is really short-term gain for long-term pain."

The government initiated the sell-off by hiring the real estate wings of two banks - BMO and RBC - to examine alternatives for "shedding" the original nine buildings. Not surprisingly, they recommended the sale-and-lease-back plan as the preferred option. More surprisingly, the same two banks were also hired as real estate agents to facilitate the sale of the buildings. They then earned a multi- million dollar commission for carrying out the recommendation that they had been paid to make!

Even the most casual adherent to the principle of fiscal responsibility might be pardoned if they betrayed some skepticism about these transactions.

However, this is just the beginning of the Harper government's unusual recipe for fiscal responsibility. By adding a measure of this government's renowned secretiveness to the mix, the government ensured that all of the details of the sale were kept secret from the public, the existing tenants, other interested parties and even other Members of Parliament until after the sale was finalized. Only the groups that wanted to buy the buildings saw the information.

With so much information being withheld, it's reasonable to ask: What is the government trying to hide and what can taxpayers expect?

Subsequent to the buildings being sold, and after it was too late to challenge the sale based on accurate information, the confidential information package was released. PSAC commissioned experts at Informetrica to dig deeper and what they found is not a pretty picture for taxpayers.

Using a conservative cap rate of 6 percent, Informetrica estimated that the buildings were sold for at least $350 million below what they would actually be worth at the end of the 25 year lease. The cap rate defines the percentage number used to determine the current value of a property based on estimated future operating income.

The government's recipe for fiscal responsibility gets even more experimental. Larco agreed to a schedule of capital improvements during the first 10 years of the lease for an amount totalling $77 million. Larco also agreed to undertake certain structural improvements over the full term of the lease. Other than that, the taxpayer is still responsible for all maintenance and operating costs, property taxes and capital improvements not specified in the schedule. The public is still responsible for about 30 per cent of the capital costs too. Furthermore, any additional costs and overruns on operations remain the liability of the public.

In short, taxpayers remain on the hook for millions in capital improvements and maintenance costs over the life of the lease, even though taxpayers no longer own the properties. So much for Mr. Fortier's argument that the sale would transfer "ownership risk for major building capital costs to the private sector."

The real estate advisors, RBC and BMO, contended that another reason that the sale was a good idea is because the private sector is 20 percent more efficient than the public sector. This supremacy assertion of private sector efficiency has never been substantiated, and we would argue it is completely false. Using this claim as rationale for selling the buildings is illogical, given that the government already contracts out most of the work to the private sector through traditional competitive tender mechanisms.

The final lease between the government and Larco is still secret but the draft lease contains about 80 pages of legal conditions that are supported by lengthy annexes. Despite this formidable inventory of conditions, the contract monitoring costs were never considered in the recommendation to sell. Contract management costs are estimated by the Brookings Institute to be ordinarily worth 10 percent of the value of a transaction or, in the example at hand, about $165 million.

The Harper government's recipe for fiscal responsibility can't be very appetizing for most Canadians. When you add it all up, even with the removal of the two Vancouver properties from the package, taxpayers still lose about $300 - $350 million in today's dollars as a result of this transaction. Annual costs to taxpayers will more than double after the sale.

Costs for the Harry Hays Building in Calgary will actually quadruple for the upcoming year. While the Government would have paid just over $5 million dollars next year to operate it and house its employees with public ownership retained, instead they will pay the private sector just over $20 million for the privilege. Furthermore, the government has abandoned future flexibility to adapt its space requirements to its changing workforce or to incorporate non-traditional and environmentally sound work arrangements into its long range human resource planning.

The secrecy continues. Larco, the new owner, will likely borrow significantly to finance the deal. Control of the properties could well be held by non-Canadian interests, despite Fortier's commitment that foreign ownership wouldn't be entertained. Moreover, the final recommendations of the federal government's advisors have not even been disclosed.

Canadians should be demanding full disclosure. "Fiscal Responsibility" should be a good deal for the Canadian public not just empty rhetoric used to fool the public. The government should stop this deal now.

John Gordon is the National President of the Public Service Alliance of Canada

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