Bankrupting The Border

Anthony Downs in his book Stuck in Traffic (1992) wrote about "triple convergence." It was an interesting concept:

• “Nearly every vehicle driver normally searches for the quickest route, one that is shorter or less encumbered by obstacles (such as traffic signals or cross-streets) than most other routes. These direct routes are usually limited-access roads (freeways, expressways, or beltways) that are faster than local streets if they are not congested. Since most drivers know this, they converge on such 'best' routes from many points of origin…
  
  Now suppose that the limited-access route undergoes a vast improvement -- its four lanes are expanded to eight. Once its carrying capacity is increased, the drivers using it move much faster than those using alternative routes. But this disequilibrium does not last long because word soon gets around that conditions on the expressway are superior.
  
  In response, three types of convergence occur on the improved expressway: (1) many drivers who formerly used alternative routes during peak hours switch to the improved expressway (spatial convergence); (2) many drivers who formerly traveled just before or after the peak hours start traveling during those hours (time convergence); and (3) some commuters who used to take public transportation during peak hours now switch to driving, since it has become faster (modal convergence).
  
  The triple convergence causes more and more drivers to use the improved expressway during peak hours. Therefore its traffic volumes keep rising until vehicles are once again moving at a crawl during the peak period.”
  
  

In thinking about this, I remembered that I had written a BLOG a few days ago (“New Border Bridge Financing 101") saying that no one would finance a new bridge. I asked:

• “If the traffic is not there and we build another crossing, can someone please explain to me how the existing crossings are going to make money? Take a declining volume of cars and trucks and have a new crossing trying to capture the business. Want to bet how long the Tunnel remains solvent or even the new crossing? Even the Ambassasdor Bridge might see some lower revenues.”
  

It seemed pretty obvious to me that if a new crossing was opened and traffic was not growing as projected, then the existing crossings and even the new one could suffer and potentially go broke. I thought I should go into some more detail and that the triple convergence theory could help explain what I was getting at. (Since we are dealing with trucks you might not think that the theory works but change “public transit” to “marine” or “rail” and it does).

Let us make some assumptions and see where it takes us. We will look at the Blue Water Bridge, Ambassador Bridge and Detroit/Windsor Tunnel. Our assumptions include some of those set out in the many volumes of the Bi-national work:

1) Neither truck nor car traffic is increasing as rapidly as was originally projected and may in fact be holding steady or decreasing

2) There are no significant trade agreements/commerce initiatives or tariff reductions on the horizon

3) The closing of auto assembly plants, reduction in tier one suppliers, no emergence of new product categories to bolster flat border volumes all point toward less optimistic crossing volumes.

4) Rigorous Customs security measures, persistent perception of Customs delays and a stable currency exchange rate all point to flat tourist & discretionary border traffic, with no dramatic demand increases on the horizon.

5) The distance for many trucks to travel is the same whether a truck uses the Blue Water Bridge or the Ambassador Bridge. ie those two locations compete with each other for a lot of the traffic

6) The cost to build a new crossing including roads, plazas and the bridge on both sides of the border is at least $4 billion

7) The cost of a bridge alone is around $600 million

8) The new bridge will have to pay customs cost recovery charges

9) The new bridge will be financed by issuing bonds secured against the tolls and probably guaranteed by the Government. The toll rates are used to pay off the debt and therefore are “fairly aggressive calculated to the maximum point of consumer resistance.” ie charging what the market will bear.

10) The Bridge Co. builds its 200 booth project at a cost of $200 million

If a new bridge is built, it will have three lanes for trucks in each direction (no cars), many Customs booths and the latest technologies to speed trucks through. It would be state-of-the-art, fully staffed and a showcase location for Customs on both sides of the border. Given its attractiveness, one should expect triple convergence: draws traffic from alternate routes, and at hours other than just the peak hours while attracting business from competitive modes of transport. Certain consequences flow from that. I want to discuss now what they may be for the border crossings and they are not pretty.

What can we expect? Mathematically, with about the same amount of traffic and a new crossing, all things being equal, the traffic would be split evenly. Where before each crossing had a third of the traffic, now they would each have a quarter. Revenues would drop significantly and there would be pressure to find the money to pay off bondholders. To reach the same revenues as before, the only thing that a crossing could do would be to increase rates OR go after the business of another crossing. With the already steep decline in traffic after 9/11, a further reduction could be catastrophic to the bottom line. And if rates are increased at one crossing and not at the others, what do you think will happen to that price increase? It would drive away traffic or would have to be reduced back.

Another alternative as my reader wrote is “If you build it they will come!… If you build a new crossing, with a new 6-lane freeway what’s to say that with a new faucet opened up for trucks that freight wouldn’t migrate from rail and/or other business models” and thus we get many more trucks not in the future but sooner. I-696 he said was a prime example. It was designed for a “20 year design window. It met capacity in less than 5 years.” That’s good for the crossings’ financial statements but not so good for us because we are back to where we started…traffic problems and very quickly. All we have done is drawn traffic away from rail and marine and back to the highways.

Let’s talk about Sarnia. The Blue Water Bridge has 2 bridges yet how often do you hear on the radio that there is a big truck tie-up there while there is none here. There is also a perception that the distance is shorter through Windsor although it is not true depending on end point. The US Government has said that the Ambassador Bridge operation is a very good one so I am certain that draws trucks here too. If a new crossing is opened up in Windsor designed to make it easy and quick for trucks to go through it would be natural to assume that truck traffic would come to Windsor rather than go to the Blue Water Bridge. In fact, we could expect some car traffic to pass this way as well since the Ambassador Bridge would be less crowded with trucks. The result would be a significant decrease in traffic in Sarnia and a large increase in tolls to cover costs. That increase would also tend to chase trucks away compounding the problem. The end result: financial problems for the Blue Water Bridge.

Let’s take that bridge out and just deal with Windsor. I have already asked how that new crossing can possibly make money with its huge costs and given the traffic numbers. How can a bridge costing so much compete with the Bridge's 200 booth project that costs significantly less. If I prove to be right, then it has financial problems right off the bat and the bondholders will call upon the Government on their guarantee.

The new bridge will obviously try to attract traffic away from the Ambassador Bridge and Tunnel. That will hurt the Tunnel less since it has fewer trucks but it will result in a decrease in revenues that will impact taxpayers negatively.

Obviously truckers will want to use the new bridge since it has more lanes and presumably they can get through Customs more quickly. The Ambassador Bridge is "paid off" so its costs per truck should be lower than the new bridge. That means that the Ambassador Bridge’s tolls would probably be lower to meet the new competition. Lower tolls due to lower costs to build 200 booths and lower overall costs would mean that the Ambassador Bridge could put up a good fight to the point that the new bridge experiences financial problems and the Government is forced to act on its guarantee.

I am just waiting too for some genius to decide that the road to the new bridge should be tolled as well to help pay for the construction cost. If the extra toll charge does not drive away traffic and bankrupt the new bridge, then nothing will!

What if the new bridge is so successful that it still draws truck traffic no matter what the Ambassador Bridge does? In that case the Ambassador Bridge would have severe financial problems AND its owner would decide to take a shot at the Tunnel’s car traffic to make up the difference.

The toll price charged by the Bridge is $8 while that of the Tunnel is $8.25 with the City of Windsor’s charge for its half only being $3.50. Is that being kept artificially low to boost tourist traffic? With its truck traffic, the Bridge could afford to compete aggressively for the car traffic and if successful, could significantly impact the Tunnel’s revenues and impact taxpayers significantly.

And if the Bridge Co. renegotiates its deal with the City of Detroit and the Port Authority respecting the Tunnel, if Eddie is right about the negative impact on the Tunnel (with which I do NOT agree) then the Tunnel is in deep trouble financially as its business dries up!

I am certain that you can figure out other permutations of the situation but the end result would be financial trouble for the crossings.

Again, I will add a comment that I have set out before from Today’s Trucking Magazine that I found very ironic:

“Even in the event that the new bridge would be contracted to another party, how would it compete with the Ambassador? Any new bridge would be heavily reliant on toll revenue just to keep above water for the next 30 years. If the Ambassador slashed rates (and Moroun could run for years at a loss), it would deter volume from spilling over to the new crossing and keep a large chunk of truck traffic right where it is. Then, with the new bridge desperate for revenue to pay off debt, can you guess who comes to the rescue?"