1. Introduction
a) Canadian experience - privatization
b) Canadian experience - public/private sector developments

2. Delegation of Governmental Functions
a) Federal and Provincial
b) Municipalities

3. The Process
a) The Request for Proposal
b) The Tendering Process
c) Legal analysis
d) Privatization tenders
e) Enabling Legislation
f) Public/Private sector development
g) Other considerations

4. Stakeholder Issues and Interests
a) Public share sale
b) Private share or asset sale
c) Infrastructure redevelopment
d) Other concerns

5. Allocation of Risk and Responsibility
a) Representations and warranties
b) Financing arrangements
c) Transfer of other responsibilities

6. Competition Issues
a) The Competition Act
b) The Teleglobe Canada Example

7. Other Regulatory Issues
a) Investment Canada Act
b) Restriction of Foreign Ownership in RFPs
c) Confidentiality and Freedom of Information
d) Securities Legislation

8. The Windsor Casino Complex and Highway 407 as a toll highway
a) Defining the objectives
b) Establishing the public interest to be protected by the public body in question and structuring the RFP and tendering process to ensure these interests are protected
c) Public expectations and legal duties with respect to a fair and open tendering or proposal process
d) Initial and On-going Monitoring, Control and Remedies

9.
a) Managing the Process
b) Checklist

10. Conclusion and Summary

Appendix "A"

Footnotes

REQUESTS FOR PROPOSALS AND TENDERING:
LEGAL CONSIDERATIONS


1. Introduction

Over the past twenty years, many of the world's economically developed and developing countries have been subject to renewed interest and domestic pressures to privatize various aspects of government operations. Recent experience in Britain, the United States, Mexico, Canada and Japan has revealed a willingness to promote increased privatization as a means of obtaining support, and to use various privatization measures to implement this aspect of their elected mandate. In addition, the more recent political and social upheaval in Eastern Europe has fueled attempts to implement market economies through deregulation, sale of government interests, and removal of trading barriers. Such measures have resulted in new problems and challenges for the traditional role of privatization in political, legal and economic analysis.

Before going further, although we talk of public/private partnerships, we are not talking of legal partnerships with either limited or unlimited liability or access to the public purse. "Partnership" is being used in a non-legal way to describe a business relationship that involves duties and obligations on both sides and a closeness of working relationship which may be akin to a working partnership. I have not seen any transaction structured in Canada as a partnership. Governments go to great lengths to ensure that the relationship is a not a partnership for legal purpose. Often the relationship involves a landlord and tenant relationship but goes much further in that it involves the construction, operation, management and ownership of a vehicle to provide infrastructure and services to be used by the public.

(a) Canadian experience - privatization

The Canadian experience with privatization is destined to be vast and comprehensive, given the extensive involvement of government in many facets of the Canadian economy landscape, both on a nationwide basis and through promoting regional or provincial interests. Although there are a number of privatizations which have occurred in Canada history, the election of the Progressive Conservative government in the 1984 Federal Election resulted in an expansive and vigorous implementation of policy for significant reduction in government intervention and ownership of Canadian enterprise. In addition to the traditional focus on the sale of government-owned entitles, the Mulroney government also attempted to implement its policies with respect to privatization through development agreements and co-venture arrangements, both in respect of the development and finance of business, and the development of so Canada's "mega projects". Ontario's NDP government has for practical financial reasons moved firmly into privatization. Current examples of large scale undertakings of this nature are the $800 million project for the development and construction of a bridge linking Prince Edward Island with New Brunswick and Ontario's recent Request For Proposals for Highway 407 (a toll highway). While the other major political parties in Canada may not necessarily espouse the position of the federal Conservatives with respect to the extent of privatization, economic and public policy analysis suggests that there is growing support from most political groups for reduction of government involvement in economic undertakings. An illustration of this growing support can be found in the Ontario NDP government's desire to have the Casino industry and new highway projects undertaken by the private sector. Hence, the political question essentially becomes one of assessing the appropriate degree of privatization. ¹

An article by the Honourable John MeDermid ², a former Minister of State (Privatization and Regulatory Affairs), contains a review of the government's policy with respect to its privatization program. According to MeDermid, privatization is important because the sale of the government's interest in corporate holdings promotes and improves the efficiency of the organization privatized as it is subjected more fully to market place forces. The resulting private sector economic pressures force managers to focus more closely on cost control, quality, service to their customers and bottom line results. In addition, Mr. MeDermid rationalizes that the second reason for adopting privatization is that it creates a fair market place. He states that true competition is difficult to achieve in a sector where a nationalized industry has a major stake. An unhealthy tendency exists on the part of the Crown-owned company to view the government as a bottomless purse capable of funding any losses that occur. Investment decisions run the risk of being made on the basis of political considerations rather than the discipline of the market place. As a result, resources may not be allocated in the most efficient way. In addition, private sector firms resent having to compete against companies that are funded with their own tax dollars. This inequity is not in the interest of developing a healthy, market driven economy. For purposes of historical context, attached as Appendix "A" is a list of privatizations undertaken by the Canadian federal government, through the Ministry of State (Privatization and Regulatory Affairs).

The principles outlined above are flexible, in that they also can be applied to support shared public/private arrangements. Depending upon the degree of privatization, responsibility flows from the public body to the private entity. Privatization is really a "fast paced" agreement for partnership, where the public sector has essentially completed its role, and is transferring the "project" to the private sector for operation under the public policy restrictions required as conditions to the transfer. As this Canadian public policy author stated, ³ "in its narrowest sense, privatization encompasses the whole or partial sale of state-owned companies but more broadly and importantly it embraces actions to reduce the role of government and enhance market forces in an effort to produce a more competitive economy. In this larger sense, privatization includes deregulation, trade liberalization, and the increased contracting out of government services." Given the wide range and myriad of methods for privatization, a component of the analysis of public/private infrastructure development involves a review of the legal considerations in structuring a transaction which includes any privatization aspects.

(b) Canadian experience - public/private sector developments

The Canadian experience is moving from the historical "pure" privatization of government owned entities toward increasing private sector involvement at a much earlier stage in the development of projects or going concerns for the public benefit. This newest wave of privatization is evident in the development or re-development of infrastructure. We have the developments at Lester B. Pearson International Airport, being the terminals; the Terminal 3 development; the re-development of Terminals 1 and 2; and the request for proposals for the new runways. As mentioned above, in Prince Edward Island we have the linked bridge, and in Ontario we have requests for proposals for management of the Windsor Casino Project and construction of Highway 407 as a toll highway. The rumour is that Ontario will also sell various Crown assets. Nova Scotia privatized Nova Scotia Power Corp. in 1992.
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2. Delegation of Governmental Functions

a) Federal and Provincial

As a result of recent trends to increase the role of the private sector in infrastructure developments, the issue of which functions may be legally allocated by the government to the public sector must be examined. In Canada, both the federal and provincial governments have broad powers of delegation. A review of the cases dealing with this matter indicates that Canadian governments can probably delegate any powers that they wish to the public sector, provided that the delegation does not constitute abdication.

In the earliest case concerning the delegation of Canadian legislative power, ⁴ it was argued that Parliament could not delegate its powers because Canadian legislative bodies were themselves delegates of the imperial parliament. This doctrine, known as delegatus non protest delegate (a delegate has no power to delegate) was rejected by the Privy Council. The Privy Council held that the Ontario legislature could delegate its powers to make regulations for licensing taverns to a Board of Licensed Commissioners. In part, the judgment states that provincial legislative power is "as plenary and as ample within the limits prescribed by section 92 as the imperial Parliament in the plenitude of its power possessed and could bestow". Based on the decision in this case, it would appear that governments may use their power of delegation to a great degree.

In Re Gray ⁵ , the Supreme Court of Canada held that Parliament's delegation of its legislative authority to federal cabinet under the War Measures Act was valid. However, the court also noted that Parliament could not effect a delegation that amounted to abdication of its powers.

The distinction between delegation and abdication has been the subject of much controversy. Since the Supreme Court of Canada in Re Gray held the broad delegation in that case to be constitutional, some authors have found it difficult to understand what could constitute abdication. In Laskin's Canadian Constitutional Law, Finkelstein argues that the distinction between delegation and abdication may have no meaning ⁶. Hogg notes that the Northwest Territories Act and the Yukon Act granted extensive powers of self-government to the two federal territories.⁷ He further notes that this sweeping delegation has not been challenged in the courts. Despite the difficulty concerning the delegation abdication question, the Supreme Court of Canada reaffirmed the dictum that delegation must stop short of abdication in A.G. Ontario v. Scott.⁸

Given that the legislative bodies appear to have broad powers of delegation, are there any powers that cannot be delegated? Hogg argues that the power to levy tax may not be subject to delegation, as section 53 of the Constitution Act requires that a bill levying tax originate in the House of Commons and section 54 states that the bill can only be passed if it is recommended by the Governor General. However, even with these constitutional provisions, the courts have been reluctant to limit the power of legislative bodies to delegate their powers. In Re Agriculture Products Marketing Act ⁹ the Supreme Court of Canada noted that sections 53 and 54 of the Constitution Act can be amended by Parliament. The court concluded that any legislation inconsistent with the sections can be taken as implicit amendment. Although Hogg disagrees with this decision, it is Clear that the courts have a propensity to allow legislative bodies to make sweeping delegations of their powers.

Nevertheless, it is possible that a broad and vague delegation may be invalid. This is especially true now with the adoption of the Charter of Rights. However, Hogg notes that sweeping federal delegations may still be valid if they relate to "the peace, order and good government of Canada". Sweeping provincial delegations may also be valid if they relate to the amendment of "the constitution of the province".

Based upon the cases and the comments of the noted constitutional authors referred to above, it is difficult to present an argument that there is a limit on the powers that the federal and provincial legislative bodies in Canada may delegate. The government's position tends to favour the view that the breadth of powers that may be delegated is potentially limitless. This rationale, as it pertains to the government's use of the public sector as a means of delegating powers, is also applicable to the private sector, particularly through government involvement in infrastructure developments and full-f ledged privatizations. The participation of the private sector in aspects of the Canadian economy formerly inhabited by the government illustrates this reasoning.

b) Municipalities

In addition to the powers of the federal and provincial governments, this section will briefly review a topic which has been newsworthy of late, that is, the privatization by municipalities of the provision for certain municipal services. The discussion will outline the source of a municipality's powers, the latest development on the privatization front, and will be limited to those municipalities which are created by statute.

As has been discussed above, the roots of government powers is contained in the Constitution. Under section 92, provinces are given jurisdiction over many areas, some of which concern municipalities. For example, under section 92(8), a province is responsible for municipal institutions in the province and under section 92(10) a province is responsible for local works and undertakings.

It is, then, the provincial legislature which creates, by statute a municipality which can, through the adoption of by-laws, carry out its mandate.

By-laws of a municipality must concern themselves with areas within the confines of the provincial jurisdictional limits. If a municipality were to pass a by-law which was outside the scope of provincial powers, that bylaw would be struck down as being ultra vires.

A municipality created by statute must operate within the bounds of. that statute. Thus, a municipality may not do anything unless it is explicitly or implicitly authorized by statute. Municipalities are empowered, under the Municipal Act, with the ability to pass by-laws covering a host of areas. Although a municipality has authority to pass various by-laws under the Municipal Act, the issue of who may provide various services requires an examination of the Interpretations Act.

Under the Interpretations Act a corporation, including a municipality, has the power to enter into contracts. However, it is usually argued that this power to contract is limited to those areas within a municipality's purview and does not operate to expand a municipality's power to contract.

Therefore, given that a municipality has, by virtue of the Municipal Act the power to pass by-laws on a plethora of subject matters, the manner in which these services are provided is up to the municipality itself. A municipality may contract out of certain services as long as it is not improperly delegating its powers or seen to be derogating from its statutorily-created powers. The legal implications of such delegation are applicable to municipalities in a similar manner to the issues for provincial and federal governments.

In recent months, there has been much discussion in the press regarding the privatization of the steam heating system and of garbage collection services in Toronto. The rationale expressed by municipalities for the privatization is fiscal restraint. Given that the City of Toronto has the power to pass by-laws dealing with garbage collection, it has the authority to contract with any party in the provision of this service. As long as the City of Toronto is statutorily empowered to do this, there is nothing ultra vires about entering into such a contract. In fact, on May 4, 1993, Toronto City Council voted to have a private firm handle garbage collection at apartment buildings, a move expected to save taxpayers approximately $1.2 million annually.

In order to facilitate privatization and encourage investment in infrastructure, the Province of Ontario has recently moved to put a new legislative framework in place including the following

(i) Bill 40 - Community Economic Development Act, 1993;

(ii) Bill 17 - The Capital Investment Plan Act, 1993; and

(iii) Bill 7 - The Municipal Statute Law Amendment Act, 1993, which relates to municipal waste management.

Other speakers will be dealing with this new legislative framework.
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3. The Process

Generally, when there is a new project or substantial development of the undertaking being privatized where the Proponents input into the design, technology, and construction, expertise in management with know-how is sought. Such privatization will be conducted through a Request for Proposal; e.g. Highway 407, the Windsor Casino Project, PEI fixed link, Pearson redevelopment. The tendering process is generally used where there is a dissector business that is to be sold off and operated by the private sector, for example, Air Canada and Teleglobe.

a) The Request for Proposals ("RFP")

Projects proceed by request for proposals ("RFP") issued on a single or multiple stage basis in which the proponents are invited to submit a proposal for the project. The RFP will describe the investment opportunity, government objectives, the project environment and the nature of the project. Proponents are expected to offer creative and financially viable proposals to achieve the project objectives. A more detailed discussion of the RFP process can be found in section 9 of this paper which sets out the process as it relates to the RFP for the Windsor Casino Complex and Highway 407.

Because of the complexity of projects of this magnitude, the government generally requires firm proposals that will remain open for a long period of time. In the Terminal Re-development Project for Terminals 1 and 2, the offer had to be open for acceptance by the government for a period of 18 months from the final date for submission of proposals. Under the Highway 407 RFP the time frame is 180 days. This leaves the government time to adequately analyze each proposal to determine which is the best overall proposal, at which time the government may grant the successful proponent the rights to negotiate a final and binding deal. The government will utilize in-house legal, technical and operational expertise and usually will also retain outside consultants and legal advisors to evaluate and carry out the privatization.

Lester B. Pearson International Airport has had four RFPs relating to various components: (a) the cargo terminals; (b) the new passenger terminal - Terminal 3; (c) the re-development of the existing Terminals 1 and 2; and (d) the re-development of existing runways and construction of new runways. Assuming all of these are completed, this leaves only one major aspect, air traffic control, operated by the federal government. Provided adequate safeguards for service are developed, there may be no reason why this function could not also be privatized.

The RFPs generally follow similar format - (a) proponent identification and qualifications; (b) development plan; (c) management and operations plan; (d) business plan; and (e) transfer plan. In developing and finalizing the proposal, the government and the proponents will have to address many legal issues which are raised and discussed in the balance of this paper.

b) The Tendering Process

Where the tender process is adopted, whether in a "pure" privatization or in a private/public sector partnership, the government provides a document disclosing information to the potential bidders, including the price or cost with the terms and any deposit requirements, the timing of the transaction, the representations and warranties to be given by the government and to be received from the successful bidder, and perhaps a draft of the final acquisition or partnership agreement. In a privatization context, the emphasis often falls on the representations and warranties required from the acquirer so that certain public policy requirements may be met. For example, the Air Canada privatization required the continuation of operational facilities in Winnipeg, Montreal and Toronto and maintenance of the head office in Montreal as a condition of acquisition.

c) Legal analysis

For purposes of more traditional bidding on projects involving the public and private sectors, the bidding for various roles is subject to legal obligations and responsibilities. The critical case of R. v. Ron Engineering and Construction (Eastern) Ltd. ¹⁰ provides the basis upon which a legal analysis of the tendering process may be conducted. The Supreme Court of Canada held that the tendering process results in two contracts being entered into. The first contract, a unilateral contract, arises automatically when the tender is submitted pursuant to the conditions of the tender and the information contained therein. The second contract is then entered into upon the successful tender application. This legal analysis of tenders may apply both for purposes of the acquisition of a government controlled entity through the privatization process and in requests for proposals in an infrastructure development ¹¹.

d) Privatization tenders

The use of tendering is mostly commonly related to construction projects, and applies to most infrastructure development. The tendering process may also be used in a privatization context, if the proposed sale is planned without the use of the capital markets. If a decision is taken to complete a privatization through the sale of shares, the capital markets become the forum in which the transaction is completed. If, however, the government decides to sell the Crown corporation directly to a business entity, the tendering process often becomes a key component in completion of the sale. While the system of public sale of shares and the tendering process can be mutually exclusive, there have been situations where privatizations have occurred by combining the fixed share sale and tendering process, so that part of the privatized entity becomes widely held, and part becomes concentrated in the successful tender bidder. An example of this type of divestiture was the sale of interest in the Canada Development Corporation completed in 1987, in which part of the government's interest was sold by way of private placement, and the remainder by way of sales of shares to the public.

In the Canadian privatization context, the decision by the government of whether to sell the government owned corporation by way of share sale or through the tendering process will depend upon the financial implications and public acceptability of these two routes. In addition, where the government intends to retain a significant part of the ownership, often a fixed price share sale is used. From a political point of view, privatizations using fixed share price sales can bolster public support due to the expectation that the fixed price tends to rise in the short term given the activity in the shares after the privatization. Not only does this method enhance the public perception of the privatization, but if the government intends to participate in a later distribution of more shares of the company, it can financially benefit from the increase in the market price. In October of 1988, Air Canada received about $246 million from the sale of 30.8 million shares at $8.00 per share. These proceeds were used to replenish the airliner's capital needs. Slightly more than six months later, the Canadian government relinquished its majority interest in the airliner by selling the remaining 41.1 million shares for proceeds in excess of $460 million. The proceeds from the second tranche, at almost $13.00 per share, went directly into the pocket of the Canadian government. ¹²

e) Enabling Legislation

If the decision to proceed with privatization by way of the tendering process is made, the traditional legal aspects of the tendering process briefly discussed above are involved.

In addition, in the federal jurisdiction, the Financial Administration Act ¹³ ("FAA") contains specific legislation which establishes the method under which the bidding for acquisition of the Crown corporation is conducted. In addition to arriving at a purchase and sale agreement which fulfills the legal requirements under the tendering process, the policy considerations of the government are promoted by the FAA, which requires evidence of compliance by potential purchasers with various conditions of sale. The current federal government has generally espoused the policy that as the number of bidders increases, the more open the acquisition process becomes. For example, the sale of CN Hotels Inc. and various hotel properties to Canadian Pacific Hotels Corporation followed review by the Canadian government of greater than 40 tender offers.

Section 90 and Section 91 of the FAA provide restrictions on the acquisition or sale of corporations or businesses by the government. Under these provisions, in order for the government to undertake participation in, or divestiture of, a company, enabling legislation must be duly passed by Parliament. Th,,s enabling legislation provides the parameters within which the tendering process must operate, including specific items to be incorporated into the articles, by-laws, and corporate provisions of the Crown corporation. If a privatization by way of sale of interest is occurring, these provisions must be complied with by the potential acquirers, who are then free to add to such provisions provided conflict does not occur.

By way of example, the sale of Teleglobe Canada by the Canadian government required specific authority pursuant to the provisions of the FAA. After review by the Ministry of State for Privatization, it was determined that the government's interest would be sold through the tendering process. The enabling legislation, passed pursuant to the FAA, addressed the specific legal issues relating to the sale of Teleglobe.¹⁴ Because of the nature of the business carried on, the enabling legislation contained provisions to institute a regulatory regime as a result of the monopoly position enjoyed by Teleglobe Canada. The legislation contained specific provisions concerning involvement of certain sectors of the telecommunications industry as shareholders of Teleglobe Canada, through restrictions contained in the Articles of Incorporation. In addition, the Articles of Incorporation contained constraints on ownership by non-resident shareholders. The enabling legislation required all potential acquirers to become subject to the provisions contained in the Articles. In addition, without the prior approval of the Governor-in-Council, none of these provisions may be amended and the Corporation may not be continued into a jurisdiction other than Canada. Through this means, the government effectively retains control over certain aspects of the privatized entity, notwithstanding that it ceases to act as owner. Each participant in the tender process, by virtue of the legislation allowing the sale of Teleglobe Canada, must be willing to comply with the provisions contained in the enabling legislation.

Through the requirement that the tender proposal include a representation to comply with and acknowledge such conditions, the tendering process imposes legal obligations upon those wishing to acquire the Crown corporation. In addition, the tendering process can aid the government by imposing legal obligations on the sale, including the purchase price and terms, restrictions on non-Canadian ownership, and maintenance of certain facilities or operations. Often, there is a lot of overlap between the legal and public policy considerations in a privatization, and the manner in which these become implemented. Through the FAA and the tender process, these issues are addressed and compliance with the government's policy objectives is assured.

The provincial governments have similar legislative requirements and procedures with regard to privatization. The municipalities also must have the necessary legislative authorities and by-laws to carry out such activities as discussed in Section 2(b).

f) Public/Private sector development

A more recent example where the tendering process has been utilized in a transaction involving the government and the private sector, which is not a traditional privatization, has been the request for proposals ("RFP") for the redevelopment and expansion of Terminals 1 and 2 at Lester B. Pearson International Airport. In this process, the government proceeded by instructing interested parties to submit a proposal with respect to the redevelopment project. The proposal was then evaluated by the government to determine the ability of the private sector to undertake the design, financing and construction of the work necessary to meet the Government's objectives and requirements, as are described to the potential participants in the RFP.¹⁵

The materials to be submitted by those participating in the tendering process, in accordance with the RFP, included a definitive plan concerning the management and operations of the proposed redevelopment project for Terminals 1 and 2. In addition, the business arrangements had to be set forth, including the financial arrangements, the lease agreements, and any buy-out options included in the plan. The response to the RFP required a summary of the qualifications of the developer which would render it eligible to provide the services required by the government in this project. Finally, the proposal itself, includes a firm offer, along with a development plan, a management and operations plan, a business plan and a transfer plan. The RFP continued with specific evaluation criteria to be utilized by the government in reviewing proposals forwarded under the RFP. Finally, specific information concerning the RFP, including the availability of further information, the government's rights, and the interaction with the Competition Act and Canada policy on South Africa were dealt with in the RFP.

As discussed above, the RFP in this context essentially provides a document upon which the tender is forwarded for consideration by the government in assessing the suitability of potential private sector involvement, and forms a basis upon which the legal obligations and implications of the private sector participants are founded. The tender document defines the legal obligations between the parties at an early stage. Such legal obligations are continually refined and re-examined throughout the arduous negotiations of the infrastructure project agreements.

g) Other considerations

The use of the tendering process, whether in a privatization scenario or in a public-private partnership for infrastructure development, allows the government to provide the potential bidders with a comprehensive list of items required in order to become a successful bidder. By including such terms in the solicitation document, they are removed from the scope of negotiation. In addition, it allows perspective purchasers to price their bids not only from the point of view of amount to be paid, but also in terms of compliance with the various conditions required by the government through the tendering document. From a legal point of view, the government must consider which conditions have to be met in order to allow the privatization to proceed. There must be a review of the allocation of risks in determining which conditions may not be removed. As is the case when any government is involved, public reaction and the effect on public policy must be taken into account. However, there must be a balance between the legal implications of compliance with the various conditions contained in a tender document and the costs of compliance by the participants in the process. In this respect, the government representatives must carefully consider and be sensitive to the corresponding cost of the allocation of risk through the use of conditions in the tender document, or the resulting bids shall become unreasonably low.¹⁶

The drafting of the tendering document must be carefully considered from a legal point of view. All information provided under the tendering process must be explicitly stated to be confidential, so that the participants will fully comply with the requirements and disclose all relevant information requested- in the tendering materials. The tendering document must also be properly structured to allow for an accurate comparison of the bid responses. Further to this, all tendering participants must comply fully with required information pursuant to the instructions of the tender process so that the competitive element between the tenders can be fully evaluated.
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4. Stakeholder Issues and Interests

a) Public share sale

Whenever private sector and government involvement is being considered for a proposed transaction, in any one of the variety of forms, the interests of the various stakeholders must be recognized and adequately addressed. In a privatization through the sale of shares to the public, the interests of the individual stakeholders may vary considerably, although the underlying interests from a capital markets point of view will focus on the ability of the privatized corporation to generate profits and provide income in the form of dividends and/or capital appreciation to the shareholders. In such a situation, as for example in the Air Canada privatization, if the government expects to retain a percentage interest after the initial phase of privatization, the stakeholders' interests must be protected from the point of view of the government's intended agenda with respect to the operation of the privatized corporation. In the Air Canada public share sale, the government's agenda was disclosed primarily in the offering document used for the distribution of the shares of the Crown corporation. It disclosed various operating and management conditions dictated by the enabling legislation allowing the privatization under the FAA. Prior to making an investment, each purchaser's interests had to be reviewed and evaluated against the offering document to ensure that the investment did not leave the purchaser with an ownership interest in an entity which had restrictions on its operations or corporate capabilities that conflicted with the purchaser's interests.

b) Private share or asset sale

Legal issues concerning stakeholders interests may become pronounced where ownership is passing directly from the government to a nongovernment corporation through the sale of either assets or shares. In protecting the interests of the acquirer in this situation, there are a number of concerns. Throughout the process, both in the initial exchange of information regarding any proposed acquisition, and in the documentation and correspondence concerning the purchase and sale agreement itself, all materials of the stakeholder must be provided on a confidential basis, unless otherwise publicly available. In particular, information concerning suppliers and distributors of the proposed acquirer, along with other business, operating plans, forecasts, know-how or proprietary information, should be subject to confidentiality agreements, so that the information may not be inappropriately utilized or made available to competitors with respect to the bid under consideration or future opportunities.

In addition to the strictly legal aspects of the stakeholders' interests which must be protected, there also is the overriding concern regarding the ability of the private sector corporation to operate an entity with the government as a "partner", or as successor for an industry formerly controlled by the government. Where the government retains either a minority or a majority interest in the business entity or infrastructure project or significant management control, this problem may become quite pronounced. In particular, the interests and goals of management may differ quite substantially where the government remains partially involved. Paramount goals of profit and accountability to shareholders become impaired by public policy and political objectives where the government remains as owner in some form. Each of the relevant legal documents must be examined to determine the role that government expects to continue to play in the entity, whether through a continued ownership interest, or through other interventions by way of regulatory or legislative or contract means. In addition, the government may impose direct restrictions on the stakeholders' ability to further alienate its interest in the privatized company, either directly or indirectly through the impact of regulatory legislation; for example, the Investment Canada Act or the Competition Act. In The Boeing Company's resale of The de Havilland Aircraft of Canada Limited, the federal government was intensely involved in the transaction from Investment Canada, Industry, Science and Technology, and Competition Bureau perspectives. Many privatizations are done through long-term leases and/or management contracts and restrictions may be of a contractual nature.

Tie parties should address the ability to effectively restrict changes in both a public company and a private company ownership structure. In the private company restrictions are easily enforced because director or shareholder approval is required in respect of any share transfer; however, publicly traded shares are generally freely transferable, unless the articles or letters patent of incorporation contain constrained share provisions. Constrained share provisions place constraints on the issue, transfer and ownership of shares of any class or series of a corporation to assist the corporation to qualify under any prescribed law of Canada or province to receive licenses, permits, grants, payments or other benefits by reason of attaining or maintaining a specified level of Canadian ownership or control. Generally, the constraints relate to the issue or transfer of shares to persons who are not residents of Canada in order to carry on a particular type of business. (See Canada Business Corporations Act, section 46(1) and Regulations Part VII for example.)

The key, of course, is that there must be federal or provincial legislation that requires this type of restriction in respect of the business activity being carried on with a license being held. This is not generally the case in infrastructure projects. Although there may be a political issue as to whether or not non-resident participants should be restricted as to their ability to own or operate infrastructure projects in Canada, one has to ask the fundamental question of why not. Experience, management, know-how, technology and financing making a competitive business in order to give the taxpayers the best service and facilities for their dollar (whether as taxpayers or user fees) has to be an important consideration as well.

However, governments have a legitimate concern and interest in who they are dealing with. Every RFP or Tender wants the Proponents identified and wants the history of the Proponents as the agreements are being entered into on the basis of who the parties are and the expertise and financial capabilities that they bring to the table. Governments have a legitimate interest in monitoring any change, and in some cases, restricting any change, o,,i a reasonable basis, in the ownership or management of the infrastructure project to ensure that the financial wherewithall and management that it bargained for will be maintained. This is particularly so in any development or redevelopment phase. This may be addressed in limiting the ability to transfer the project or transfer interests in the project by certain of the stakeholders, or of the control block. These restrictions must also take into consideration whether or not the project will be a private vehicle or a public vehicle and the nature of financing required, whether debt or equity. Lenders will have to be assured that they can sell their security on a reasonable basis in the event that there is a default. Alternatively, a government body, in the event of a default relating to a lender, may also want the right to purchase or take over the project, in which case terms satisfactory to lenders in project financing will have to be negotiated between the government and the Proponents to facilitate such financing. If the financing is immediate, the lender should also be involved at that time. Lenders are lenders. They do not generally want to become the owners, nor do they want to complete a project, particularly if it has several stages over several years. There will be considerable negotiations where the infrastructure project is being done by way of ground lease to the Proponent with leasehold mortgage financing for construction and take-out, long-term financing contemplated.

c) Infrastructure redevelopment

In addition to the interests of stakeholders requiring protection where a privatization is occurring, there are a number of interests which must be protected where a project for infrastructure development is being pursued jointly by private and government forces. In the redevelopment of Terminals 1 and 2 of Lester B. Pearson International Airport, it is important that throughout the process the goals and ambitions of the private sector stakeholders are reviewed by legal counsel to ensure that their interests are adequately protected. The basis for such interests comes from the initial information contained in the request for proposals, which must be reviewed to determine what concessions and obligations will be required from the successful private entity in completing the infrastructure development project. In addition to the financial, planning and business obligations which are undertaken, the interests of the stakeholders must be reviewed with respect to the public policy obligations imposed by the government through such a process. In the redevelopment of Terminals 1 and 2, public policy issues such as security for the premises, arrangements for the employees of Transport Canada, and compliance with various requirements of the Federal government. For example its policy on South Africa, bilingualism, employment equity, and compliance with provincial and municipal laws even though constitutionally they would not be applicable to the federal undertaking, present factors which impede the ability of the stakeholder to operate the infrastructure development based solely upon independent choices and alternatives. The ability of the stakeholders to comply with such obligations, and to work within the confines of government involvement in the transaction must be thoroughly reviewed and analysed by government prior to issuing the RFP and the Proponents prior to forming a response to the request for proposals, and before proceeding to the point of finalizing agreements for the infrastructure redevelopment.

d) Other Concerns

Protection of the interests of the private sector may be accomplished through determining and analysing the goals of government in participating in the transaction. In the Air Canada example, the interests of the private investors were restricted in that the enabling legislation limited each particular shareholder to no more than 10% control, limited cumulative foreign ownership to 25% of the nongovernment shares, required bilingualism to continue as an official policy of Air Canada, and also identified specific operational constraints to preserve regional maintenance bases and to maintain corporate headquarters in Montreal. Also, specific reference was made to compliance with the Employment Equity Act, and continuation of employee relations policies. Many of these obligations were already legislated, and were simply contained in the enabling legislation for public policy reasons. In this context, the interests of the stakeholders must be reviewed to determine their ability and desire to become involved in such an undertaking.

The process of privatization, whether partial or full, provides the private sector with a seldom seen opportunity to have government explicitly state the social goals and policies which are inherent in its ownership of a government controlled entity. Instead of generalizations concerning national and regional issues, once privatization is undertaken the government must enunciate in the documents under which it participates with the private sector exactly what aspects of the business will be protected and advanced by the government. These government objectives, if the privatization involves the full transfer to the private sector, can be constantly evaluated through the financial performance of the corporation and by monitoring the reactions of the shareholders. A more imprecise measure and review of performance is available if the government continues to play a role, either through ownership or management interests in an infrastructure development.¹⁷
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5. Allocation of Risk and Responsibility

The more recent inclination to increased privatization and involvement of the private sector in infrastructure projects has led to a decline in the traditional method of government planning, financing and ownership of infrastructure development. The modern approach affects the government's role to include risk sharing through participation in loan commitments and mortgages on the site of the infrastructure development, the sharing of operating and capital costs, participation in sale-leaseback arrangements, assisting the private sector by reducing administrative and bureaucratic red tape and regulatory problems, encouraging co-operation among any number of local and regional government entities, and participating in development ownership activities following the completion of the infrastructure project. While the variety of ways in which the public sector may become involved in such a project has increased, the role of the private sector has also continued to expand, including a deeper involvement in the planning, design, financing and ultimate marketing of the infrastructure development. This change is, in a legal context, one from a contractual relationship in which the public sector essentially develops the project and then contracts it out to the private sector, to a partnership relationship in which there is co-operation at the planning stage and an agreement subject to revision as is determined appropriate throughout the life of the project. This expansion and re~definition of the roles of the public and the private sector also signals a rationalization for the reallocation of risk and responsibility throughout the various phases of the project.

a) Representations and warranties

The allocation of risk and responsibility may be analyzed from the view point of the particular representations and warranties. These can be reviewed from a project planning point of view, in terms of financial aspects, and in terms of ongoing responsibilities following completion of the construction portion of the infrastructure development. In addition, representations and warranties may be used as a type of "political spreading of risk", in that the private sector contingent may be required to covenant specific matters, including the involvement of non-Canadians, or the continuation of certain regional facilities. For example, the recent privatization of Air Canada resulted in all investors purchasing shares in the privatized entity becoming subject to the Articles of Incorporation, which contained specific restrictions on the ability to involve foreign investors, and the ability to relocate certain operational and head office facilities. Through this process, the government imposes certain representations and warranties on the private sector investors purchasing an interest in Air Canada, and fulfilled its public policy agenda by making the private sector investors responsible for maintenance of certain regional facilities. In the sale of hotel properties of Canadian National Railway Company (I'CN") to Canadian Pacific Limited ("CP") CN required CP to represent and warrant it would honour all existing employment contracts and pension benefits, absorb all existing employees, and maintain operations of the hotels similar in style and class to that in place during CN's ownership.

In infrastructure projects there will be contractual arrangements as to the management and operations including standard of operation and maintenance upgrading to met technological advances, compliance with environmental standards, modernization and safety standards. Consideration will have to be given to how defaults will be remedied, what happens on bankruptcy or insolvency, the right of government to take over management and control or to cure defaults in order to keep the facilities continuously operating. An airport cannot be closed, water turned off or a sewage treatment plant shut down for defaults with the control of owner or operator.

b) Financing arrangements

Financing agreements are a common method of risk and responsibility allocation through combining public sector benefits such as tax exemptions with private sector capital resources. Through the allowance of tax reduced or exempt contributions, the government can use the tax system to attract resources and capital to specifically targeted aspects of the economy. The financial risk of the investment becomes transferred from the private investors to the public sector, with the extent varying on the level of tax and amount of the tax incentive involved. Private investors share the requirement for financial resources in the infrastructure development, but reduce their exposure by tlqing the available taxation reductions or deferrals provided by the government.

In the public/private partnership context, there are several methods of establishing the financing relationship between the governmental entity and the private sector participant. All three, however, result in the same payment structure. In an instalment purchase agreement, the public authority and the private entity enter into an arrangement which provides for the payment of periodic sums on an instalment basis equal to the debt service on the bonds or other form of debt that were issued to finance the project. The governmental entity retains title to the project until the principal and interest on the bonds have been fully amortized. At this time, the facility is transferred to the private enterprise for a nominal fee. Alternatively, the local authority may enter into a lease purchase agreement with the private "partner". The lease agreement provides for rental or lease payments equal to the debt service on the financing indebtedness. The local authority retains title until the indebtedness has been retired, at which time the facility is turned over to the private entity for a nominal sum. It is important in lease purchase or instalment purchase arrangements that the monthly rental approximates prevailing fair market values for similar facilities in order to remain competitive. The third type of financing is pursuant to a loan agreement whereby periodic payments of principal and interest are made to the public authority, which retains a long-term mortgage on the property.¹⁸

Projects such as the PEI fixed link, the Terminals 1 and 2 redevelopment, the Windsor Casino Complex and the proposed Highway 407 ar, a toll highway provide examples where financing will involve long term ground leases being granted to the proponent and the proponent, who pays lease payments to the government, construct improvements and raises equity and debt (based on leasehold mortgages) from the public or private sources.

Included in an infrastructure development is the public sector symbiotic benefit from increased property and sales tax bases, and expanded employment opportunities for citizens. By combining efforts with the private sector through a partnership for infrastructure development, the public sector effectively spreads the opportunity for the generation of increased tax revenues from the business and its employees. The government's responsibility for generation of income from tax revenues, and indirectly for the creation of jobs, becomes transferred to the private sector through private sector participation in such developments.

c) Transfer of other responsibilities

Another type of obligation which is allocated to the private sector in shared infrastructure projects is the ongoing responsibility for compliance with regulatory rules. The private sector becomes subject to another form of government intervention in the imposition of such regulatory regimes, and must accept responsibility for ensuring compliance with such matters. For example, in the recent privatization of Teleglobe Canada, the private sector, in the form of Memotee Data Inc. became subject to regulatory scrutiny by the CRTC, with the inherent obligations effecting future pricing, profits and long term viability.

If the government remains involved in the project, whether in the form of ownership, partial privatization, or through continued involvement in an infrastructure redevelopment or development project, the presence of the government may be used by the private sector participant to reallocate the risks associated in the bureaucratic process. For example, 'in the recent request for proposals in the Terminal 1 and 2 redevelopment project at Lester B. Pearson International Airport, the presence of government has allowed certain concessions concerning proposed expansion of existing runways and related facilities which are directly tied to the viability and prosperity of the Terminal 1 and 2 redevelopment project. Through the continued involvement of government in various capacities of such an infrastructure development, the government shares some of the responsibility with the private sector in aiding the economic viability of such an undertaking. The underlying documents supporting such a transaction must address these issues, to ensure that the government is obligated to maintain its role for the benefit of the private sector in such a transaction.¹⁹
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6. Competition Issues

a) Competition Act ²⁰

One of the more prominent rationale used in advocating privatization projects, normally by representatives of government, is that privatization will result in increased competition and in efficient allocation of resources. In addition to natural forces, competition in Canada is affected by the Competition Act, which was proclaimed in force in 1986, replacing the previous Combines Investigation Act and predecessor legislation in the area of regulating competition in Canada. The Competition Act applies to all businesses carried on in Canada, which includes activities carried on by the government sector, provided they do not fall within one of the exceptions contained in the Competition Act. Prior to 1985, governments and their corporations were not subject to such legislation. The Competition Act contains both criminal and non-criminal provisions, and the determination of the status of a matter into one of these two categories effects the process and the applicable enforcement provisions. Included as criminal offences under the Competition Act is conspiracy, bid~rigging, discriminatory and predatory pricing, price maintenance and misleading advertising or deceptive marketing practices. Non-criminal reviewable matters include mergers, abuse of dominant position, refusal to deal, consignment selling, exclusive dealing, tied dealing, marketing restrictions and delivered pricing. The non-criminal reviewable matters, when referred by the director under the Competition Act, are reviewed by the Competition Tribunal under non-criminal law standards. Conversely, the cases involving alleged criminal offences under the Competition Act are brought before criminal courts, with strict rules of evidence and charges if guilt is proven beyond a reasonable doubt. While regulatory issues are dealt with below, the director under the Competition Act may also appear before federal boards, commissions or other tribunals if competitive issues arise in regulated industries.

In conducting its review of a potential privatization action, the government must take into account the applicable provisions of the Competition Act. Many of the traditional undertakings operated by government teid to be in areas of the economy which, for a variety of reasons, may not be sustainable under ordinary private sector competitive market conditions. For this reason, government privatization proposals ordinarily do not violate the provisions of the Competition Act. The government effectively can transfer a monopoly or oligopoly position from the public sector to the private sector, without changing the competitive nature of an industry. In these situations, the impact of the Competition Act is lessened dramatically as the likelihood of reducing competition in the industry is slim.

The Competition Act impacts upon privatization where the public entity, for public policy reasons, provided sourcing activities or supply services to various regions of Canada. Vigorous enforcement of the Competition Act may mean that these arrangements are technically violations. However, based upon the discretionary powers of the director under the Competition Act, such matters are normally not prosecuted although within the realm of non-criminal reviewable matters. In addition, many matters which normally would be subject to the Competition Act may also be subject to specific government regulation, which essentially can substitute for the concerns to be combatted by the Competition Act. Teleglobe Canada, after its privatization, became subject to the CRTC and its inherent ability to regulate against the profit oriented goals of a monopoly.

Where the government has decided that a particular business in an industry shall become a privatization project, the requirements of the Competition Act may be compromised. For example, in the recent sale of the assets of The de Havilland Aircraft of Canada Limited from The Boeing Company to Bombardier Inc., the government's desire to complete the transaction resulted in a process which proceeded smoothly and efficiently from a Competition Act review standpoint. This desire may be linked to the obligations of government and. its public policy objectives, related to its former ownership of de Havilland. The government was in a position to provide a means for an acquirer to obtain a more dominant position, in an industry which the government formerly participated. However, in the de Havilland case, although a dominant domestic manufacturer, the true market and competitive focus is international. In the proposed subsequent resale to a European consortium the international focus was critical in the Competition Bureau approving the transaction. However, the EEC stopped the transaction based on the dominant position of the combined entities in a certain segment of the European market. Depending upon the acquirer, the government may inadvertently facilitate a reduction in competition, even though privatization is often hailed as a means of increasing competition from the efficient allocation of resources.

In the privatization of Terminals 1 and 2, the RFP provided for review by the Competition Bureau of the proposal documentation to ensure the maintenance of a competitive environment. Issues here relate to air carrier access and equality of treatment, pricing of concession products and services at the airport. These issues can be addressed by establishing comparison pricing and contractual terms with the Crown.

The wide variety of reasons pursuant to which the government becomes involved in specific industries, including the existence of a natural monopoly, promotion of regionalism, and general public policy, all tend to dampen the impact of the Competition Act for the purposes of privatization. However, where the effect of privatization on a particular industry is demonstrated to the director under the Competition Act as being a violation of the Competition Act, or where the director takes the initiative, the resolution of the matter under the provisions of the Competition Act may occur.

Many infrastructure projects are by their nature monopolies, e.g. the PEI fixed link is the only fixed link. Competition is by ferry (to be replaced, I understand) and by air. Pricing policy will therefore be an important factor to be monitored by government. Similarly, a waste water treatment facility or water treatment plant will result in a single source of supply for a certain community and pricing policy will be a major concern in privatization.

b) The Teleglobe Canada Example

There is an extensive amount of interplay between various regulatory regimes and the Competition Act, as has been referred to above in regards to de Havilland, and in the case with Teleglobe Canada. Often competition concerns are addressed through government regulation, to the extent that there may be some duplication. One example of lack of regulatory control in a government monopolized industry was that of Teleglobe Canada. Teleglobe Canada derived its roots from concerns in the mid-1940s amongst the commonwealth countries that competition from American direct radio circuits may result in U.S. dominance in the market and would require intervention by way of government participation in the industry. Accordingly, the government of Canada purchased the Canadian assets of Cable and Wireless Ltd. and Canadian Marconi Ltd. and created the Canadian Overseas Telecommunications Corporation. By legislation passed in 1975, the name of the company was changed to Teleglobe Canada. Teleglobe Canada as a Crown Corporation was an extremely profitable enterprise, which is not necessarily the case or the rationale for maintaining public ownership. There is wide speculation amongst authors in the area of publicly-run undertakings that long-term profit is neither a goal nor realistic given the realities of government ownership.²¹ However, Teleglobe Canada superior performance in terms of profitability may be traced to its de facto monopoly, and its freedom from regulation. Teleglobe Canada had not been established by the government as a monopoly provider to telecommunication services. However, regardless of the intent of the legislation creating Teleglobe Canada, within a few years of its formation it operated under monopoly conditions in the Canadian overseas telecommunications market.

These monopoly conditions provided significant issues when the government made its decision to involve the private sector in the international telecommunications industry, by privatizing this infrastructure element after the 1984 federal election. In 1987, as part of this initiative, the government introduced a national Telecommunications Act in order to subject Teleglobe Canada to regulation by the Canadian Radio-Television and Telecommunications Commission ("CRTC"). However, a brief by Teleglobe Canada Management to the Minister contended that CRTC regulation was inappropriate and could have deleterious consequences on the corporation because of the unique international telecommunications environment.²² In its statement to the Minister, Teleglobe Canada management insisted that the firm was already subject to effective public control and to add additional regulatory restrictions would merely impose a further burden. The threat of additional regulation disappeared, however, when the legislation failed to advance beyond the first reading on three different occasions. Perhaps the reason for the government's lack of persistence to regulate Teleglobe Canada in its monopoly position as a proprietor of international communications was its consistent record of profit and dividend payments to the Canadian government.²³

As had been the case of much of the debate surrounding the privatization of Teleglobe Canada, the regulatory regime in which the privatized entity would carry on business did not become a major issue in the determination of whether privatization should or should not occur. Instead, it appears that the privatization of Teleglobe Canada was in keeping with the Progressive Conservative agenda of shrinking the state, and the goal of attaining the largest sale price possible in order to contribute to the government's deficit reducing objective.²⁴
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7. Other Regulatory Issues

a) Investment Canada Act ²⁵

The Investment Canada Act has been instituted as a means by which the federal government maintains the right to review certain acquisitions of Canadian businesses by non-Canadians. These provisions have been fundamentally revised with respect to American acquisitions of Canadian business through the free trade agreement entered into between Canada and the United States. The impact of the Investment Canada Act on public/private partnerships for infrastructure development, or on privatizations in general, has not been widely felt to date. For obvious public policy reasons, whenever a privatization is being pursued, the allocation of interests among the various private sector participants normally contains a foreign ownership limit. For example, in the public sale of shares of Air Canada, non-resident ownership was limited to 25% of the issued and outstanding capital. This is not a dissimilar item to, restrictions on banks or cable and television license holders.

While the regulatory scheme invoked by the Investment Canada Act has not applied directly to a privatization undertaken by the federal government of Canada, its existence provides a regulatory mechanism by which unexpected or undesired changes in effective control of privatized entities by foreign interests may be controlled by the federal government. This analysis also applies to a partnership for infrastructure development, especially where final control and operational capabilities are transferred to the private sector at the commencement or completion of the project. In addition to specific conditions of Canadian ownership and management imposed as legal obligations on private sector members involved in such transactions, the federal government has the ability to institute and monitor compliance with broad based policy issues concerning foreign ownership using the investment provisions contained in the Investment Canada Act.

b) Restriction of Foreign Ownership in RFPs

On a general level, the Investment Canada Act gives the government the power to place restrictions on ownership of Canadian businesses by foreign sources. Although this may not ultimately allow for restrictions to be placed on those who submit a tender or proposal, it will allow for restrictions on the foreign ownership of the successful bidder or Proponent. In the past, foreign ownership has been restricted in the privatization of Crown Corporations. This is illustrated in the restriction that was placed on the non-resident ownership of shares of Air Canada as mentioned previously. Ontario's recent example of RFPs for the Windsor Casino Project and Highway 407 as a toll highway illustrates that the Ontario government, although it may have the power to restrict what proposals, and tenders it will accept based on foreign ownership, it is not currently placing such restrictions in RFPs.

It is not uncommon in requests for tenders by municipalities for the municipalities to favour local businesses. When all else is equal, a tender by a local business within the municipality will often be successful. This has more to do with political process than legislative barrier. Recent RFPs do set out that certain information is required to be submitted by the Proponent concerning ownership and indicating the ownership structure of the Proponent. This includes all the names of the individuals who have direct or indirect ownership interest in the Proponent. In the RFP for Highway 407, the government has stated that it is seeking an industrial benefits plan which will maximize the supply of goods and services from Ontario and the rest of Canada, and that this is to be done in the context of an open and competitive tendering process. Although the government has not explicitly stated that it will consider the amount of foreign ownership of the Proponent, it does appear that the government is concerned with maximizing the use of goods and services from Ontario and the rest of Canada. As well, should a certain plan be implemented by the government, it will clearly have to identify the sources of supply, e.g. whether they are foreign or domestic, and if domestic, whether Ontario or the rest of Canada. Respondents under the RFP must also submit a Developer Questionnaire. This questionnaire includes requests for information regarding the beneficial owners and controlling interests of the respondents. These must be identified in detail.

c) Confidentiality and Freedom of Information

Very often a government will require that a Proponent of an RFP or tender provide extensive personal and financial information regarding themselves and others connected to the proposed project. This will usually entail the use of a consent and release form which gives the government the power to obtain personal information about individuals connected with the Proponent. The RFP for the Windsor Casino Project contains an example of the standard language used in a consent and release of information request. This RFP sets out, "to evaluate the personal and financial integrity and the professional capabilities and standings of those who seek to be involved in the financing, design and construction of the Casino Complex and in the operation of the businesses to be carried out in the Casino Complex, personal information about individuals connected with the Proponent is required by the Ministry of Consumer and Commercial Relations (The 'Ministry")".²⁶ Such consent to the release of information will require that directors and officers of the Proponent must consent to the direct and indirect collection, disclosure and use of certain information by the Ministry. This will require that a notice of consent and release be signed. The government emphasizes that the release and collection of the information is necessary in order for the highest quality proposal to be accepted.

Along with its request for disclosure of information, the government is also required under the Freedom of Information and Protection of Privacy Act ²⁷ to protect the confidentiality of such information in its possession and control and to use the information only for the purposes for which it is collected or for consistent purposes. The RFP f or Highway 407 as a toll highway also contains similar wording with regard to the disclosure of information. In the Highway 407 RFP, the Crown sets out that it will consider all proposals as confidential, subject to the provisions and the disclosure requirements of the Freedom of Information and Protection of Privacy Act and any other disclosure requirements imposed by law. This is qualified, however, in that the Crown will have the right to make copies of all proposals for its staff, legal and financial advisors and representatives.

Thus, although the government may require extensive and comprehensive information and details about a Proponent's personal and financial integrity and professional capabilities, any such information that is disclosed by the Proponent will be subject to the provisions and disclosure requirements of the Freedom of Information and Protection of Privacy Act. Given this assurance of confidentiality, the government is attempting to elicit complete, accurate and comprehensive information concerning all those individuals that are to be involved in the project.

The relevant provisions of section 10 of The Municipal Freedom of Information and Protection of Privacy Act, R.S.O. 1990, ch. M.56, protects the confidentiality of trade secrets or scientific, technical, commercial, financial or labour relations information, supplied in confidence implicitly or explicitly, if the disclosure could reasonably be expected to a) prejudice significantly the competitive position or interfere significantly with the contractual or other negotiations of a person, group of persons, or organizations; b) result in similar information no longer being supplied to the institution where it is in the public that similar information can continue to be so provided; or c) result in undue loss or gain to any person, group, committee or financial institution or agency. There has been some litigation over assistive information by third parties. It is therefore important that in supplying information, Proponents explicitly provide that the information is confidential and not only confidentiality for the submission, but for any other documentation being provided in the terms of the section. It is also wise to enter into confidentiality agreements. Generally, in dealing with Ontario and the federal government on RFPs, confidentiality agreements are entered into by the Proponents with the Crown and with the parties' respective consultants and legal advisers. This reinforces the position and makes everyone aware that the material is confidential. Of course, it goes without saying, the more people who have access to information, the greater the opportunity for disclosure inadvertently or advertently. Careful control over access to information is critical in order to maintain the integrity of a bid process and the negotiations.

d) Securities Legislation

Another area of regulation applicable to public/private partnerships for infrastructure development and to recent privatization efforts in Canada, is that of securities laws. The Canadian government, in its privatization of Air Canada, arranged to sell common shares of the capital of Air Canada to the Canadian public. In completing these transactions, the Canadian government ensured that compliance with provincial securities legislation and regulations occurred. For instance, specific regulations concerning advertising contained in provincial securities legislation, regulating the contents of such advertising, were specifically adhered to by the government in its promotion of the public distribution of the shares of Air Canada. Share issuances, whether by means of a privatization transaction or in a public/private project for infrastructure development, create potential securities law concerns which must be addressed by the legal advisor.
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8. The Windsor Casino Complex and Highway 407 as a toll highway ²⁸

a) Defining the Objectives

Recent examples of RFP for the Windsor Casino Complex and Highway 407 as a toll highway, illustrate the process through which RFPs are carried out by the Province of Ontario. Both these RFPs attempt to establish public-private partnerships thorough the development of specific infrastructures. In developing the RFPs for such proposed infrastructures, the government must first establish and define its objectives for the proposed project.

Although the objectives of the government will vary depending upon the infrastructure in question, ultimately the generation of revenue or the savings of expenditures are the basis for many if not all of the recent RFPS. As well, government objectives may also include the desire to develop specific sectors of the economy and/or promote free market competition within a particular industry.

The objectives set out by the government in respect to the RFP for the Windsor Casino Complex illustrate this point quite effectively. The primary objective of the government in developing the Casino infrastructure has been identified as the desire to promote economic development within the province. Included within this primary objective is the desire to create jobs, promote the tourism and hospitality industries, establish a viable new industry in the province and provide revenues to the province. The Casino Complex is viewed as a great opportunity to generate a significant amount of economic benefit for the Province of Ontario. In a recent News Release published by the Ministry of Consumer and Commercial Relations, it was estimated that the Casino Complex will provide more than 8,000 direct and indirect jobs and an annual revenue of $140 million for the province.²⁹

Similar to other RFPS, the government had definite objectives in mind when developing the RFP for Highway 407 as a toll highway. The major objective with regard to this project is the development of a facility at a reduced cost and in a shorter period than would otherwise be possible should the government attempt to complete such a project. The need for this highway is recognized by the government (prior governments had been assembling the lands for years), yet, the current state of government financial expenditures is viewed as a major prohibitive factor in carrying out any such project. Hence, the objectives of the government include its financial contribution being minimal.

In developing this highway infrastructure, the government also has the objective of protecting the interests of highway users as they relate to fair pricing and quality 'of service. Other objectives include the encouragement of the development of exportable expertise for Ontario based companies. This being in the area of toll road design and construction, management, project financing etc. Other benefits such as industrial growth, diversification, and competitiveness of Ontario firms are recognized by the government as being objectives which this RFP may foster and encourage.

Ultimately, it is the government's objective to have the highway project returned to the government fully completed, in a good state of repair, and at no cost to taxpayers or the government except for the toll fees on a user-pay basis.

b) Establishing the public interest to be protected by the public body in question and structuring the RFP and tendering process to ensure these interests are protected.

Although public-private infrastructures may generate sizeable amounts of. revenue for the government, reduce certain expenditures, and create jobs, the public interest must still be addressed and protected throughout the development and operation of the infrastructure. The objectives of the Government must be tailored to include those which will protect these interests.

Certain already established interests will likely be affected by the proposed Casino Complex infrastructure. Among these are the horse racing industry, charitable casinos, bingo establishments, and lotteries. These interests have been identified in a study ³⁰ commissioned by the government in relation to the project and will no doubt be taken into consideration when evaluating the various proposals that are submitted. Proponents will need to be sensitive to such government concerns and develop proposals that will interfere the least with such interests.

The Government has also recognized that the interest of the public in relation to the integrity of the casino gaming itself, and the safety and security surrounding such projects must be addressed in any RFP concerning casino projects. Hence, the government has retained a great amount control which it will be able to exercise over the infrastructure once developed and operating. These include vesting the Ontario Casino corporation with the power to ultimately decide how the casino games will be conducted and managed. The right to monitor the operations of the Casino Complex will greatly assist in any such control.

With respect to the RFP for Highway 407, the government recognizes that the issues of safety and expense are of major concern and in the public interest. As such, the government requires Respondents in pursuing the objectives with regard to this RFP to keep in mind the issues of safety, efficiency, quality of service, and environmental responsibility in the operation of this facility. The government has also set out that needs and concerns of neighbouring communities will need to be addresses in each proposal as we as the specific amenities along the highway that are to be provided.

The government has established that the successful Respondent will be wholly responsible for any hazardous waste, or issues relating thereto. The RFP also requires that the Respondents set out in their proposal, for the government's approval, the type and amount of insurance proposed to be carried by the Respondents during the design and construction of the highway. Thus, the government is attempting to protect the public interest with regard to any damage and/or injuries that may occur during the design and construction phases of such a large project.

Other interests such as archeological finds are also provided for in this RFP. Respondents will be responsible for any issues which may arise as a result of the Heritage Act. With regard to maintenance and repair of the highway, this will need to be maintained pursuant to the maintenance standards of the government. Above all, the government intends to oversee all aspects of the project to ensure that the highway facility meets all government safety standards and that it protects what are perceived as the interests of the public.

c) Public expectations and legal duties with respect to a fair and open tendering or proposal process.

There are expectations that any RFP process will be conducted fairly and in a somewhat publicly open manner. Although such expectations may exist, the Government has set out various terms and conditions in its RFP for both the Windsor Casino Complex and Highway 407 which allow it to decide how much, if any, information or details regarding the proposal and selection process will be made public.

The government established a list of terms and conditions that will apply to the RFPs for the Windsor Casino Complex. These include the government not binding itself to accept any proposal and allows it to use its sole discretion in determining which proposal will be accepted. In addition to this, the government reserves the right to waive any deficiencies in a proposal, and approve any changes. Those submitting proposals are prohibited from disclosing any details pertaining to the selection process in whole or in part to anyone not specifically involved in their proposal, unless written consent is secured from the government ministry prior to such disclosure. In addition to this, until a contract resulting from the RFP is executed, Proponents are prohibited from making available or disclosing any details pertaining to their proposal with anyone not specifically involved in their proposal. Once again, a Proponent can receive authorization from the Ministry to disclose details pertaining to their proposal but this is in the sole discretion of the Ministry. Proponents involved in the process are also prohibited from issuing any news releases or public announcements pertaining to the details of their proposal or the selection process without prior approval of the Ministry.

Similar to most RFPs, all proposals become the property of the government and the government reserves the right to publicly disseminate any information contained in the proposals. It is this area where confidentiality of certain commercial and Technical and proprietary information becomes an issue. Generally, the parties agree to maintain the confidentiality of certain information subject to the access to information legislation. They also retain the right to use any ideas or adaptations of ideas which are presented in the proposals. With respect to a open tendering or proposal process, the government has the ability to make public the names of any or all of the registered Proponents.

The government has set out that the primary purpose of the RFP is to select the highest quality proposal for the Casino Complex. It further states that it is committed to providing a fair and open selection process. Given the nature of the Casino Complex, the government has decided not to create a set of absolute evaluation criteria. The basis for this decision involves the complex nature of the initiative and the wide range of possible proposals that can be submitted.

In selecting the four firms chosen to proceed to phase two of the selection process of the RFP, the government has stated that this selection was based upon the merits of the proposal, the advice of experts in the casino industry, an evaluation of the bidder's ability to develop and finance a project of this size, and the management experience and depth of the Respondent.³¹

The RFP sets out certain further duties with respect to ensuring a fair and open proposal process. These include a commitment on the part of the Respondent to negotiate in good faith with the ministry and/or Ontario Casino Corporation to finalize and implement the agreements to be entered into in connection with its proposal. A list of the names of consultants and advisors to the Respondent must also be made available to the government. A detailed summary of financing sources for the Casino Complex must be submitted as well.

The private sector has been given quite a bit of freedom to develop and define the most appropriate proposal for the Casino Complex. The government has set up a selection committee composed of deputy ministers of the Ministry of Consumer and Commercial Relations, Culture, Tourism and Recreation, Economic Development and Trade and Finance. This selection committee will review proposals with the assistance of experts in specific areas of casino design, operations and management and by the staff of the Ministry. The selection committee will make recommendations to the Ministry with respect to developing a short list of preferred Proponents. As well, a review panel comprised of prominent Ontario residents will be established to assist the Government and the selection committee.

As in the RFP for the Windsor Casino Complex, a proposal review committee has been established under the Highway.407 RFP which will recommend to the Lieutenant Governor which proposal has best met the criteria set out in the RFP. Unlike the Casino Complex RFP, the government has established a detailed list of criteria by which each proposal will be evaluated. This provides for certain expectations of a fair tendering and proposal process. The government has also, similar to the RFP for the Casino Complex, retained the discretion to apply any other criteria that it may determine appropriate.

The conditions imposed under the RFP for the Casino Complex with respect to the release of any information regarding the proposals and the selection process is equally applicable to the Highway 407 RFP.

With regard to the legal agreements, the government expects to enter into a variety of agreements with the selected Respondent. These will include a Development Agreement and any leases and related agreements required by the Respondent and ultimately acceptable to the Crown. Within all of the agreements that will be necessary to establish the relationship between the Respondent and the government, the Respondents must identify terms, conditions or arrangements which represent the minimum requirements to be incorporated into the agreements. As well, the government will have the right to assign all agreements to any other party including the Ontario Transportation Capital Corporation.

d) Initial and On-going Monitoring, Control and Remedies

The casino legislation (Bill 8) sets up a provincial regulatory commission which is given the responsibility of regulating all aspects of the internal safety and security of the casino operations.

In the study published by Coopers & Lybrand ³², two principal reasons for such close public scrutiny are discussed. The first being concerns about the public and private integrity with regard to legal casino gambling, and the second being that casino gambling on such a major scale involves the movement and reporting of vast sums of cash and cash equivalents.

It is essential that strict regulation and control remain in the hands of Government for it will allow for close public scrutiny of the operations. Some objectives of such strict government regulation involve the disclosure of the source of casino financing, being able to follow the financing and returns, and ensuring the integrity of all parties participating in and associated with the casino industry. The Coopers and Lybrand study further states that regulation of casino gambling can serve three major functions. The first is in respect to the need for establishing the means by which owners, operators, investors, backers, employees and vendors can be screened, approved and their participation monitored. The second function involves the need to establish a comprehensive internal management, accounting, security, surveillance and reporting system to monitor and assure the integrity of gaming and the financial activities. The 'last major function involves being able to establish rules and regulations that allow for the uniform operation and conduct of the gaming. It is the assumption that all of these forms of regulation will help protect the public's interest.

By intending to oversee all aspects of the Highway 407 project, the government is attempting to ensure that the final facility meets all applicable government safety standards. The government has included a comprehensive list of conditions within the RFP that allow for the ongoing monitoring of the operations of the Respondent and remedies in the case of default. Detailed criteria for the tolling technology and the toll collection system have also been provided for in the RFP. Respondents will need to develop an approach and a toll collection and enforcement mechanism that is in accordance with this criteria and the framework established by Bill 17.
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9.
a) Managing the Process

Having acted in a number of negotiations with government, the most underestimated factor on both sides is how long the process will take and the complexity of the transaction from both the government's and the private sector's perspectives.

The political process allows for input, not just by the Proponents, but by their competitors, and by special interest groups through the political process not only during the preparation for an RFP when the government has announced its intention to take action, but during the selection process. Once selected, during the negotiation process that will ensue thereafter, often the unhappy suitor continues in pursuit of the target with the hopes of assisting in derailing it, thereby having another opportunity. Various public interest groups continue to express their concerns (legitimate or otherwise) and often from a lack of knowledge of what is going on. In many cases, although there may be the political will to carry out a transaction,, there will be a divided bureaucratic will. Add one more level of government and you increase the complexity. There are no standard forms and there are no cookie cutter deals. Hopefully, with municipal infrastructure and evolvement over time, there will become some standardized formats whereby the cost of these transactions can be reduced on a legal and financial basis.

Centralized record keeping and a centralized management of the document flow are essential.

b) Checklist of Legal Issues to be Addressed in Infrastructure Privatization

Each infrastructure privatization will have different complexities, and each will vary because of the nature of the enterprise being privatized, for example, an airport versus a sewage treatment plant, water plant purification, garbage collection, a highway, toll bridge, sewers, water supply ;)r any other capital project or service that the government may contract with a third party to provide. However, there will be many issues which are common concerns, and the answers will vary for each project. Below is a checklist of a number of issues, assuming that there will be a ground lease and/or a management and operations agreement.
(1) The Lease Term, Renewals: Infrastructure projects are generally long-term projects with intensive capital expenditures, e.g. the PEI fixed link or Pearson Airport, and, therefore, require long terms arrangements for amortization of the capital costs and to provide an adequate return for the investor/operator. Renewal periods can be tied to benchmarks for infrastructure improvements or upgrades and buyback options.

(2) Rent: Fixed? Inflation factors? Rebates? Percentage rent? (avoid profit participation because of its implications for partnership relationships).

(3) Financial Records and Statements: These are required on a timely basis to permit adequate monitoring of the financial circumstances of the operator to ensure continued continuity of service.

(4) Designs, Plans, Architects Drawings, Engineering Drawings, Operating Manuals and Procedures: All of these documents must be available to the government on an ongoing basis so that in the event that there is a default and the government has to step in and take over operation of the facility it can do so.

(5) Taxes: As a private enterprise, this may be the first time that the activity has been subject to tax on a federal, provincial and municipal basis.

(6) Utilities: Who is providing; what easements are required; and who pays.

(7) Provision of Space for the Government Representatives or Agents to Provide for the Monitoring

(8) Use of the Facility, Non-Arm's Length Relationships: All charges to the facilities need to be on an arm's length basis and any non-arm's length charges have to be identified in order to be approved. They can be measured against a test and adjusted if necessary.

(9) Insurance - The nature of the insurance and the adequacy thereof. Should an insurance trust be used?

(10) Maintenance and Upgrade: What is maintenance? What is a capital improvement? What upgrades are required and to what standards? Is there a continual upgrade or staged upgrades? Are there recognized standards in the industry for the type of upgrade or maintenance required? Do new standards have to be established? What is the standard that the government wants, is it an international standard or a domestic standard? How will the costs be handled? Generally the operator will be prepared to do anything that is required, provided that he is recovering his costs and maintains an appropriate investment return or management profit.

(11) Inspection: How often and by whom? What are the consequences?

(12) Damage or Destruction to Premises: Whether owned by the government or by private enterprise, damage or destruction has to be repaired on a timely basis depending on the nature of the structure. Consideration should be given to alternative provision of services or supply in a disaster scenario.

(13) Alterations: Generally, alterations are only permitted when notice of them is given and they are not inconsistent with the agreements governing the project. Substantial alterations generally require prior consent which may or may not be unreasonably withheld, depending on the circumstances.

(14) Assignment and Sublease: As discussed above, the government body generally has a valid interest in either being involved in, consulted about or controlling the assignment and sublease process.

(15) Mortgage and Assignment of Rents: Generally, major projects will be financed by bond financing which charges the structures and will generally include specific and floating charges. What limits should there be on the financing? What limits should there be on over-leveraging of the project? Should all mortgage financing be subject to approval or should there be a range of permitted financing and should the financing be related only to the specific project? If the government is taking over the project, is it taking it over subject to financing at some point or does the financing have to be paid out? The mortgagees will want protection for their interests and the government will want protection of its interests. Generally there will be a tri-partied agreement between all the parties relating to certain aspects of the financing, notice, curative provisions, and priorities.

(16) Default: What happens on default, either on an operational basis or because of bankruptcy or insolvency, or because of a change in control that is not permitted? On an operational basis, the facilities have to continue to be operated either by the operator, the debt holders, or the government. The government body has to be in a position to step in to ensure continuity of an essential service.

(17) Capitalization and Liquidity Requirements: It is important that capitalization and liquidity requirements, both at the beginning and throughout the term, be maintained on a basis consistent with the nature of the project and the ongoing business in order to ensure the viability of the project. Restrictions on dividends and other forms of distributions may be required.

(18) Exclusivity: Is this infrastructure project to provide exclusive services? What competition will there be? What rights does the private investor/operator have in the event that users are appropriated by the government and assigned to a competitor?

(19) Management and Operations: Each facility will require a detailed management and operation plan to be incorporated into a legal agreement which will provide for the management and operation and maintenance of the facility. This will require covenants by the operator as to how it will operate the facility and to what standards. This will be a very detailed document and will require significant input from experienced management and operational personnel in order to deal with virtually every aspect of management and operation of the facility. For example, with respect to an airport terminal, it will likely have to deal with issues relating to the air carrier operations; aircraft fuelling; traversing of the airport apron; qualifications of the general management and its relationship with the users, through an airport committee or directly, and with the airport general manager and his or her staff; plans of operation; provision of data; charging of rents, fees and charges and compliance therewith; movement of traffic; air traffic services; ground transportation; security and the tenant security manager; co-operation with the Crown; safety; environmental issues; records access; national security; alternations to the complex; use of Canadian goods and services; compliance with international laws and regulations; and support of government programs.

Each of the issues raised in the foregoing paragraph will have to be dealt with in detail. For example, on facilities engineering and maintenance, matters would have to be dealt with such as the following: management philosophy; maintenance and engineering organization; maintenance management systems; major maintenance-operations; preventive maintenance on structures; preventive maintenance groundside on roads, bridges, tunnels, overpasses, garages, parking lots, etc.; preventive maintenance on electronic systems; and emergency/contingency planning.

On the environmental issue, one would expect to address a mission statement or commitment to environmental excellence; operations management; emergency response; hazardous substance use; solid waste generation and disposal; liquid waste generation and disposal; fuel handling and storage; and air quality.
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10. Conclusion

As has been discussed in this paper, the ever changing role of government concerning its involvement in and support of various aspects of the economic structure creates many legal issues. In Canada, the primary change in this role resulted in a number of privatization projects completed by the federal government over the past 10 years. The more contemporary form of privatization involves private and public sector "partnerships" for the development of the infrastructure of our economy. The primary examples currently underway are the privatization at Lester B. Pearson International Airport; the PEI fixed link; Highway 407; Casinos; and Toronto's garbage. The spectrum for future applications of this form of shared economic development is potentially limitless.

In advising private sector participants in these kinds of privatization matters, it is important for the lawyer to address the issues and interests referred to above. In particular, the unique issues raised by the continued involvement of government in a project with the private sector requires special consideration. By adequately protecting the interests of both the private sector investor and the public in privatization transactions, the relative success of such ventures will pave the way for future expansion in the application and viability of such arrangements.

Summary

The RFP establishes the framework within which the government will be negotiating and the proponent's response will establish the framework from which the proponent will be negotiating. The final documentation will incorporate aspects of both and may result in hundreds or thousands of pages of documentation. Accordingly, the RFP should be drafted to try to raise as many of the issues and the parties' position thereon as possible and the reply should do the same.
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7. Peter W. Hogg, Constitutional Law of Canada, (3rd ed. - Supp.) (1992) Carswell - Thomson Professional Publishing, Toronto, C. 14.

8. A.G. Ontario v. Scott (1956), S.C.R. 137.

9. Re Agriculture Products Marketing Act (1978), 2 S.C.R. 1198.

10. 1981, 13 B.L.R., p. 72.

11. See generally Leonard Finegold, "Creation of the Bid Contract" in Legal and Business Strategies for Construction Bidding and Tendering" (Insight Seminar - March 21, 1990).

12. John Langford and Ken Huff man, 'Air Canada" in Privatization, Public Policy and Public Corporations in Canada, ed. Allan Tupper and G. Bruce Doern (The Institute for Research on Public Policy, 1988).

13. Financial Administration Act R.S.C. 1985, c. F-11, as amended.

14. Teleglobe Canada Reorganization and Divestiture Act, 1987 S.C., c. 12, as amended.

15. Lester B. Pearson International Airport, Terminal Redevelopment Project, Request for Proposals, March 1992, Transport Canada.

16. See pp. 448 and 449, Susan Short Jones, "The Process of Developing a Cost-Effective Public-Private Partnership: The Team Approach," Public Contract Law Journal, v. 21, p. 442 (Spring 1992).

17. See pp. 122 - 125, John Langford and Ken Huffman, "Air Canada" in Privatization, Public Policy and Public Corporations in Canada, ed. Allan Tupper and G. Bruce Doern (The Institute for Research on Public Policy, 1988).

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18. Robert H. Freilich, "Public/Private Partnerships in Joint

19. See pp. 442 and 446, Susan Short Jones, "The Process of Developing a Cost-Effective Public-Private Partnership: The Team Approach," Public Contract Law Journal, v. 21, p. 442 (Spring 1992).

20. Competition Act R.S.C. 1985, c. C-34 as amended.

21. Richard Schultz, "Teleglobe Canada", c. VIII, Privatization, Public Policy and Public Corporations in Canada, ed. Allan Tupper and G. Bruce Doern (The Institute for Research on Public Policy, 1988), See pp. 337-339.

22. (Supra), p. 338.

23. (Supra), pp. 338 and 339.

24. (Supra), p. 342.

25. Investment Canada Act, R.S.C. 1985, c. 28 (1st. supp.), as amended.

26. See Appendix B - Consent and Release Form, Request for Proposals Windsor Casino Complex, April 19, 1993 (Ontario Ministry of Consumer and Commercial Relations).

27. Freedom of Information and Protection of Privacy Act, R.S.O. 1990, c. F-31.

28. Certain information in this section has been obtained directly from the "Request for Proposals for Windsor Casino Complex", April 19, 1993, (Ontario Ministry of Consumer and Commercial Relations) and "Request for Proposals for Highway 407 From Highway 403 to Highway 48 As A Toll Highway", September 1, 1993, (Ontario Ministry of Transportation).

29. News Release, September 20, 1993, Ministry of Consumer and Commercial Relations.

30. See Report To The Ontario Casino Project: "Ontario Casino Market and Economic Impact Study", The Coopers & Lybrand Consulting Group, August 12, 1993.

31. Supra, note 29.

32. Supra, note 30.

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