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Members of Parliament demanding open bid on Maid of the Mist lease

Forensic auditor blows lid off secretive sweetheart deal

March 24, 2009

By Frank Parlato Jr.

The lease to operate the Maid of the Mist boat service, launched from publicly owned docks in Niagara Falls, Ont., will likely be put out for competitive bidding, numerous Canadian government sources told the Niagara Falls Reporter this week.

This means the 38-year monopoly enjoyed by the present Maid of the Mist boat operator, James Glynn, may soon end.

Glynn has operated boats from dock leases on both sides of the Niagara since 1971, giving him exclusive rights for every boat tour run under the falls since that time.

Despite the fact that the current lease for use of the docks doesn't expire until November, the Niagara Parks Commission (NPC) secretly approved a new 25-year lease last April for Glynn's company.

NPC Chairman Jim Williams and General Manager John Kernahan neglected to inform the other commissioners voting on the deal that two other companies, Ripley Entertainment and Alcatraz Media, had expressed an interest in bidding.

And although Alcatraz and Ripley's officials have repeatedly stated they are willing to pay the parks commission up to twice as much as Glynn, the lease awarded last April actually lowers Glynn's rent.

Glynn's reign would have remained unchallenged for another 25 years, but for NPC board member and Ontario businessman Bob Gale, who saw NPC Chairman Williams and General Manager Kernahan working, he thought, a little too feverishly to get Glynn's new lease approved a year-and-a-half before it expired. Gale complained to the Ontario Integrity Commission.

It turned out that the feverish rush may have been caused by the fact that world-famous Ripley Entertainment had asked to bid on the lease. It came as a shock to Gale, since both Williams and Kernahan declined to tell the part-time commissioners about Ripley's interest. For the first time, the terms of Glynn's leases received a liberal dose of sunshine when the Reporter began a series of investigative articles last July.

Williams criticized the Niagara Falls Reporter for its coverage. "We are being attacked," he said in interviews. "Under siege" was the phrase he used in an e-mail to other commissioners.

"This keeps getting bandied about like it's an important news story. The reality is, it's only important to a couple of people in the community." Williams said.

Last week, the Integrity Commission issued its report on this allegedly unimportant story. Besides demanding an audit of the NPC that will result in a careful review of all their leases, the Integrity Commission recommended that "in the course of the Ministry review of the (Maid of the Mist) lease renewal, the Ministry provide the Board the opportunity to review its decision ... with full knowledge of all the expressions of interest received (from Ripley's and others)."

And the NPC is required "to weigh numerous business and legal issues ... with full knowledge of the expectations of the public and ... in relation to sound agency governance and Revenue Generating Opportunities."

Published policy on revenue-generating opportunities in Ontario is well established, which is to "advertise and tender."

Ontario Tourism Minister Monique Smith said, however, that the NPC reviewing their decision won't necessarily have to mean the lease has to go to tender.

"We'll provide them with that opportunity to go back and look at the process they used. We'll provide them with some information on governance and accountability," she said.

Williams said the review could lead to the same decision. "Nothing has changed from what the board considered on April 18," he said.

But members of Parliament, who ultimately have to approve the lease, are taking a different view.

Kim Craitor, who represents Niagara Falls, Tim Hudak, MPP for Niagara West-Glanbrook, and Peter Kormos, who represents Welland, have all gone on record demanding the lease be put out to bid.

"A request for proposals will clear the air and maintain the public's trust in the NPC. Taxpayers deserve no less." Hudak said.

"We have an expectation it's going to be looked at in a different way since it's being sent back," Craitor said. Craitor said the NPC should scrap its current lease and start over with a competitive bidding process, and added that he was prepared to override any decision Smith might make about the handling of the process.

"If there's a disagreement with the Minister of Tourism, it's going to be what I think it is," Craitor told the local press.

Simply put, when the commissioners voted for the lease, they were not given information business people normally need to make an important lease decision.

The NPC is losing money. To stem losses, they have been laying off staff and shortening their season. The NPC is deeply in debt.

Before Williams became chairman, the NPC earned a profit of $3.7 million in 2004.

They lost $4.3 million in 2008.

While neglecting to tell commissioners about Ripley's interest, Kernahan nevertheless reported that a change in operator would cause the NPC to lose the name "Maid of the Mist." This was either a grossly mistaken impression on his part or a bald-faced lie.

The Glynn corporation -- which calls itself "Maid of the Mist Steamboat Co. Ltd." -- has been in existence only since the 1970s. The name existed for 125 years before he came along. And according to the lease, the name

"Maid of the Mist" can be retained by a new operator.

Paragraph 6.03 states:

"Tenant (Glynn) acknowledges that it does not claim any interest in or rights in the words 'Maid of the Mist' except in its company name and the name of its motor vessels and NPC is free to use 'Maid of the Mist' in identification of its structures, retail or promotional material."

Kernahan proceeds with what could at best generously be called a lie by omission.

He reported, "The current agreement (lease) is 'landlord friendly.' By not renegotiating ... the agreement with the Maid of the Mist, we had hoped to avoid weakening the original agreement."

But while Kernahan has told anyone who would listen that Glynn's rent was increased under the new lease, a forensic auditor hired by the Toronto Globe and Mail to review the agreement concluded exactly the opposite.

Damian Alksnis, a partner at MG Forensics Group in Toronto, found that while the new lease raises the rent by 2.5 percent on the lowest $11.5 million Glynn makes, it drops the rent by 9.5 percent on every million above $17 million.

Glynn made $17 million in 2005. Since then, he has earned well over $20 million per year.

On a handout they gave commissioners, Williams and Kernahan tried to show the NPC would get more rent -- but, curiously, they showed numbers only from 2001 to 2005, rather than more recent years.

The information presented to the commissioners for their review was two-and-a-half to seven-and-a-half years old. It included no numbers for 2006 or 2007.

Rates have increased since 2005 by an average of 94 cents per passenger.

In reports when presenting numbers for a future income-based percentage lease, the standard practice is to project into the future rather than use past years without factoring for inflation.

The losses to the NPC from the new Glynn lease will be an estimated $626,700 in the first year alone, and possibly $25 million over the 25-year term of the lease.

The NPC is believed to have budgeted revenue of $3.5 million from Maid of the Mist for 2009. Under the new lease, starting in 2010, it if it is not reviewed and redone, NPC should start budgeting about $1 million less per year.

Like Kernahan, Jim Williams claimed the lease was better for the NPC -- before he knew the Reporter had obtained a copy of it.

"When all the factors were considered in total, this was a good lease and a good business decision," Williams said. On March 6, Williams told the Globe, "Our revenue will increase through the extension of this lease."

"If I were picking one, I'd go with the old lease," said the Globe's forensic accountant Alksnis.

Alksnis concluded the parks commission will make less money "by a significant margin, over the next 25 years, given inflation and fare increases that have already taken place."

This year alone, he said, the boat tour will bring in $24.2 million, if it can attract the same number of passengers it did in the first half of this decade. Under the old lease, the parks commission would be entitled to $3.6 million of that, but under the new one, it would earn just over $2.9 million.

"So they're worse off ... under the new lease agreement," Alksnis told the Globe. "Once you hit ($17 million), you're worse off, and you're exponentially worse off."

Christopher M. Glynn, president of Maid of the Mist Steamboat Co., said the documents obtained by the Reporter and the Globe were incomplete.

"I'm not able to comment on what's in there, but I can tell you that you have a critical omission there," he said.

Glynn refused to provide details or documents.

"To suggest that there's no adjustment for ticket-price increases over the period of the lease is incorrect," he said.

But the secretive Glynn did not go as far as saying the new lease is better.

The Reporter obtained the so-called "critical omission," and frankly it doesn't change much at all.

It is this:

"Re-negotiation of the rental rate ... will be allowed every five years commencing in year 10. ... if agreement can not be reached it would be subject to arbitration with the proviso that no arbitration judgment shall be for less than the existing percentage rents. Arbitration will be in Niagara Falls by a sole arbitrator appointed under the provisions of the Ontario Arbitration Act 1991."

In other words, the critical information is that Maid of the Mist gets a lower rent for at least 10 years, and then they get to negotiate on a rent increase. If they do not agree to a rent increase, then it goes to arbitration.

Can you imagine renting a government locale to a tenant and not having the power to raise the rent unless he agrees?

Kernahan then threatened the commissioners.

"There is also the question of lease renewal and damages. ... It is expected that the Maid of the Mist would make a case for damages, if any, based on the difficulty on relocating their business, the value of the boats, etc. The exact extent of these damages would have to be determined by a court."

Of course, this is preposterous.

A lease with an expiration date has no mandate for renewal.

Tourism experts said competitive bidding may bring in as much as $150 million more over the life of the lease.

That by itself might cure the problems for the NPC.

We'll be awaiting the results of the NPC review.

 

 

 
 
 
  Copyright © 2008 Frank Parlato Jr.