Yahoo Finance Worst deal ever? The 407 is worth $30B today – Ontario sold it for $3.1B in 1999
SNC-Lavalin Group Inc. will sell 10.01 per cent of its stake in 407 International Inc., the private consortium that controls the profitable tolled highway in north Toronto, for an expected $3.25 billion, the company announced Friday.
That’s more than a billion than what the government earned 20 years ago – for selling the leasing rights to the entire highway.
In 1999, the Ontario government leased Highway 407 for the next 99-years for $3.1 billion, or $4.4 billion in today’s dollars.
At the time, it was the largest privatization of a public asset in Canadian history. But in hindsight, it may be considered one of Ontario’s biggest financial missteps, considering the SNC-Lavalin sale pegs the value of the highway at at least $30 billion.
SNC-Lavalin will sell the 10.01 per cent stake in the highway to OMERS, the pension fund for municipal employees in Ontario, for $3 billion. However, that figure could reach $3.25 billion, depending on if financial thresholds related to the performance of the highway are met. The deal, which is expected to close within two months, leaves the Montreal-based engineering and construction company with a 6.76 per cent stake in the 407 road.
Then vs now
So how did the province end up on the losing side of the what has turned out to be an extremely lucrative deal?
In October 1998, then-Premier Mike Harris’ Progressive Conservative government introduced Bill 70, known as “An Act to engage the private sector in improving transportation infrastructure, reducing traffic congestion, creating jobs, and stimulating economic activity through the sale of Highway 407.” The legislation allowed the government to privatize Highway 407, which the province had constructed for a cost of around $1.5 billion.
A few months after introducing the bill, the government announced it had leased the highway for $3.1 billion to a Spanish-led consortium that included SNC-Lavalin, the Caisse de Depot et Placement du Quebec and Grupo Ferrovial-Cintra, and a Spanish construction company (holding 23 per cent, 16 per cent and 61 per cent stakes, respectively.)
The sale boosted the Harris government’s coffers, just as it was heading into an election. (Harris ended up winning a second majority government in June 1999.)
Privatizing the highway meant the government would miss out what turned to be a cash cow for the next two decades, as well as control of toll increases, as Bill 70 explicitly gave control of toll collection and establishment to the new owners of the highway. (Granted, a Highway 407 operated by the government would likely not have been able to make as much money as 407 International is currently making, given that toll increases are not exactly a winning issue with voters.)
Rolling back toll hikes eventually became a campaign promise for the Liberal Party under Dalton McGuinty, which came into power in Ontario in 2003. After years of legal sparring, which included at least 14 court challenges according to news reports at the time, the McGuinty government reached a settlement with the company that reduced rates for some drivers, but did not include a full-scale rollback.
Today, ownership has slightly changed and the 407 is a money-making machine.
The 407 is owned by Spain’s Cintra Global S.E., a subsidiary of Ferrovial, which owns a 43.23 per cent stake. Indirectly owned subsidiaries of the Canada Pension Plan Investment Board own 40 per cent of the highway, and, once Friday’s deal closes, OMERS will own 10.01 per cent and SNC-Lavalin 6.76 per cent.
The company running the 407 reported revenues of $1.4 billion in 2018, an increase of $122.6 million from 2017. At the same time, net income also increased from $470.1 million in 2017 to $155.9 million in 2018. Operating expenses were $179.7 million in 2018.
According to 407 International, there were 1.52 million transponders in circulation as of Dec. 31, an increase of nearly 100,000 from a year earlier.
Editor’s note: The article has been updated to clarify the lease agreement for Highway 407. The province will regain operating control of the road in 2098.
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