Public Bridge Financing Woes

Governments are talking about the new Windsor bridge being financially "self-sustaining" as part of their Governance model, presumably in the context of a "public" bridge. They want to keep tolls as low as possible by maximizing revenues from other sources and getting involved in sophisticated financing packages to do so.

This truly sounds fantastic. What more could anyone want. Of course, anyone who reads the House of Commons debates on Bill C-3 knows that it won't happen. Just take a look at them and read about finances and public bridges.

If a precedent is set in Windsor about financing the cost of a bridge, both from its construction and its operation, then the Governments are going to have to get into the bridge subsidy business across the country. And that is unlikely to happen.

On January 20, 2006, I wrote a BLOG on "New Border Bridge Financing 101." On February 3, I wrote a BLOG about "Bankrupting The Border."

The gist of what I wrote was:

• "No one in the private sector will finance [a new border crossing] at this time since it is a money drain that may never make a profit! And the public sector won’t either."

In looking at the DRTP project, I did some calcualtions and said:

• "If one adds together construction costs, the Canada Customs Cost recovery charges for new border crossings, financing costs even at some low interest rate, operating costs and some kind of a profit, then there is not very much room to make a buck especially when one has to compete against the Bridge Co’s tolls."

I suggested with respect to the existing crossings:

• "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 is time for a reality check!

I am raising all of this again since I think it would be really interesting to do some actual calculations on how a new border crossing would compete against the existing crossings and what the effect would be. The recent increase in Tunnel tolls and what the impact has been on their volumes gives us real insight into what another crossing will do financially. The governance issue is still being discussed amongst the bureaucrats who may not know how to do the math for building a border crossing and operating it. (Or may not want to!)

The Tunnel tolls were changed on July 1.

• "the vehicle rate on the Windsor side of the tunnel will jump from $3.50 Cdn to $4 and $2.50 US to $3.50.
  
  The largest increase will be a 50 per cent hike in the US rate for a roll of tokens from $40 to $60. The Canadian price for tokens will also go up from $60 to $70."

I have heard that the Tunnel took a big hit in July. I was told that their volumes dropped by about 60-70,000 vehicles. Presumably a considerable number of vehicles diverted to the Bridge because of their lower rates or people stopped coming over, the Tunnel increase being the last straw. What it does seem to demonstrate is price sensitivity on the part of Tunnel users---increase the price and they go elsewhere or do not come over as often or at all.

It's a wash. I would think that the toll revenues due to the increase has almost been matched by the reduction in revenues due to the huge loss of volume at the Tunnel. Some more good management planning I see by the Windsor Tunnel Commission Chair. How will the Tunnel pay for the large cost over-runs on the Ventilation building if the revenues do not increase---creative "bridge financing" as the City did before with WUC bank loans or straight out City subsidies or loans via the taxpayers?

Let's do a bit of math to prove my point. The new crossing is conservatively estimated to cost $1.5 billion for each side of the border. MDOT has been emphatic, especially at the hearings in Lansing, that we ought not to worry about costs since tolls will be charged to cover the costs.

Well obviously the geniuses at MDOT have no understanding of how the real world operates. If we take MDOT at its word and amortize the cost of the crossing, here is what we get as an example:

The Amortization table is calculated based on the following information:

Loan Amount: $1,500,000,000.00
Interest Rate: 5.00%
Loan Term: 75 Years

The payment is about $76 million a year for each side of the border.

If we assume that there are 10,000 trucks crossing the border daily and that 50% of them will immediately use the new bridge, then just to pay the amortization costs alone, the toll on the new bridge would have to be about $42 per truck. If one adds in Canada Customs Cost recovery charges operating costs and some kind of a profit, add in another $15-20 or more

Considering that the average truck toll cost at the Ambassador Bridge is between $15-20 and that it operates now at about 50-60% capacity, let us ask some questions:

1. Who would pay $50 or more per truck to use the new bridge when they could pay less at the Ambassador Bridge
2. Which private enterprise group would finance a bridge that could not compete and could not cover interest payments.
3. Which private enterprise group will even consider financing the bridge once the Bridge Co. starts building their enhancement project
4. Why should taxpayers have to finance a money-losing crossing
5. Who other than taxpayers would have to finance the losses of the new bridge every year forever
6. How much will the the Government lose on the new bridge when it goes bankrupt

We have not talked about car traffic yet. Remember that the new bridge would carry both cars and trucks

1. Does the Tunnel now have a new competitor who will take more traffic away from it putting its financial future into jeopardy
2. How would the Bridge Co. respond to a threat to its car volumes too. If it acted as a rational operator, it would cut costs to the bone in order to keep tolls low or offer other inducements to attract traffic. [We saw what happened to the Tunnel when it increased tolls]
3. Will all three crossings now have major financial difficulties requiring Government bailouts to keep the economy going

But never fear, there is the bureaucratic answer: Bill C-3. There is no doubt but that Transport Canada would first direct traffic to each crossing and probably divide it "equally." Of course, with three operators fighting over traffic volumes that are not increasing much now and are well below the high numbers of years ago, we might have a problem. Two operators are struggling financially now---how will adding a third help?

So then the obvious answer is to increase tolls at each crossing so as to make the crossings at least break even. But wait, that helps the operators but what about consumers of the crossings, both trucks and cars. They would have to pay substantially more to use the crossings. So Bill C-3 becomes a statute that hurts consumers in the pocket-book not helps them. The likely result--more trucks will avoid Windsor by using the Blue Water bridge and tourists, especially day-trippers will stay away, thereby ruining the cross-border business! Of course for commuters, costs will increase dramatically too so that they will need a higher salary!

Remember also that the need for and the viability of a new crossing is based on optimistic DRIC traffic projections that growth will take place. What if they do not? The projections have had to be revised downwards several times already. Does anyone see traffic volumes going upwards significantly in the future and if so, on what realistic basis? Not tourist business and not based on industry with jobs being lost in the region.

We need a solution that makes practical and financial sense already. The more that this goes on, the more ridiculous it becomes. It really is time for politicial leadership at the Senior Levels to get involved and to stop "respecting the process." The Legislators in Michigan have at least acted. They have voted for a private enterprise solution by killing the MDOT financing. Isn't it time that the Canadians did too!

Let Government do what it does best--own and build roads to a crossing. Let private industry do what it does best--own, finance, construct and operate a crossing. Make sure that there is the appropriate Government oversight and everyone wins!