Wanna Buy A Tunnel

Have I got a deal for you.

Did you hear about the gullible man who almost bought the Brooklyn Bridge? It seems as if he may be buying the Detroit Windsor Tunnel instead.

I happened to see some numbers about what the Tunnel might be worth in my research and I thought that I would test them out.

Back in February, 2005, the Mayor claimed that "We're sitting on a $200 million to $300 million asset." But that was when he said that Windsor was getting $6.6M as a dividend. At that time, the City was looking to hire someone who would live and breathe tunnel business to make it prosper. After all, the Tunnel was called as well "our greatest revenue-producing asset."

In November, 2005, Representative Steve Tobocman, D-Detroit said "Factoring in inflation, Detroit's side of the tunnel is worth at least $62 million up front, Tobocman said. In 2020, the city could ask for $118 million for its portion of the tunnel, he said." (He's probably using an inflation factor of around 4.5% and that is after DCTC was gone).

I assume that Rep. Tobocman got the number from someone in Detroit City government. If we multiply it by 2 to include Windsor, then we would get a value today of about $125 million for the Tunnel. That is quite a drop in value in less than a year!

Let's not take those numbers too seriously. I am not sure how one would reconcile $2-300M with $125M. I would expect that both sets of numbers may be prone to some exaggeration. One always wants to err on the high side when selling. Just as a laugh, if we take Eddie's numbers for Super Bowl ($100M) compared with reality (my calculation of $5-10 million), then the Tunnel is not worth much, perhaps a maximum of $30 million.

We need to have a public debate about the Tunnel and other City-owned assets and what we should do with them. But we won't. Under the Purchasing By-law:

• Sec. 32. (1) A Sole Source purchase may be used for the purchasing of goods and/or services for Contracts of any Contract value, in the following circumstances:
  (i) Where a public/private partnership exists.
  
  

It may well be a good time to do something with the Tunnel. Infrastructure companies around the world are competing with each other for places to park their money for the next 50-99 years. Actually acting two years ago would probably have been better since the Tunnel miseries would not have been as evident as they are now. However, since Eddie is a "legal technocrat" we should never expect him to act quickly.

Whatever the value, we need to look at factors that might result in deductions from the gross amounts to see what the Tunnel is really worth. In the end, some financial analyst will crunch numbers to see which infrastructure asset makes the most sense from a business case perspective whether the asset be a tunnel, bridge, pipeline, nuclear plant, transportation hub or airport.

There is an equivalent of a first mortgage: the DCTC agreement with 14 years left to run. DCTC would need to get some cash out first if they were to be bought out of their contract. They would not go cheaply although I reckon they might be happy to go. It paid US$53M in 2001 for its interest in the Tunnel on the US side. It also is entitled to profits for the next 14 years. If Windsor made $6.6M, then DCTC must have made a few dollars too. I expect as well that DCTC have sunk money into the Tunnel for improvements that they had expected to amortize over the life of their involvement so that number would have to be calculated. It would not be at all difficult to develop a number in the range of $70-75M or more as a buyout number.

And do not forget that the City will be loaning the Tunnel $10-15M to be paid back with interest so that is something to be recognized as an upfront cost also.

Then let us assume that each City has to pay for its own refurbishment of their Tunnel Plaza. That's $10 Million for Windsor ($20 million may be paid by the Senior Levels, maybe) and $50-70M on the US side.

Over the next 50-75 years we know that we will have to fix up the Ventilation building again and this time, put in scrubbers to clean the dirty air being spewed by the Tunnel over the downtown now. That has to be more than $20M if the situation this time around is repeated.

The Tunnel is getting old----and if we add in another 75 years, well it will need some major reworking. The Holland Tunnel in NYC opened in 1927 and I saw a story dated in 2003 that the Port Authority in NYC will invest over 5 years "$216 million in capital improvements at the Holland Tunnel. The funding for this project will allow us to continue to take the measures that keep this facility safe and in a state of good repair, and also allow us to meet the demands of both motorists and the surrounding community." So we are talking serious money even if the Holland Tunnel is much bigger. (Our Tunnel was renovated in 1993 at a cost of $50M)

Of course, if an investor puts in money a rate of return is required, never mind covering operating costs.

One generally would want to invest in an asset that has a growth potential. But with our Tunnel, we have seen a huge drop in traffic volumes and in revenues since 1999, about 1/3 in each case. With the passport law, high Canadian dollar, tourism drop, business melt-down and the potential of another border crossing competitor whether a new public bridge or an enhanced Ambassador Bridge with 200 customs booths, one would have to be a wild-eyed optimist to expect business to grow.

There is another factor that would have to be considered as well. The successful infrastructure developer would undoubtedly have its toll setting powers restricted by the 2 City Governments. After all, the Tunnel has a public aspect to it as well, as Eddie keeps trotting out.

Now I am not a number cruncher but it is easy to see that a significant upfront investment would have to be made to cover the DCTC buyout amount and cover loans. That initial sum alone is about $85 million dollars. That amount on an amortization calculation of 75 years at 5% interest works out to about $4.4 million a year. That alone equates to about 1/3 of the Tunnel revenues.

If we do the same with capital costs as set out above ($200 million) to be paid over the years, that is another $10.2 million per year or just slightly less than the total revenues of the Tunnel.

So far, we have exceeded the value of the yearly Tunnel revenues and have not added in operating costs or return on investment or taken into account growth potential and competitive factors.

To be direct, I have no idea whether my approach is the right one or not when one looks at an infrastucture investment for the long term. All I can see is investing in an asset at a loss for a number of years until tolls are allowed to increase with no contribution to operating costs or return on investment in an environment where the traffic and revenues have steadily declined for years with no growth in sight.

Frankly, if Forbes is right about the value of the Ambassador Bridge "The bridge's likely worth today: half a billion dollars or more," and its revenues are so much higher than the Tunnel's with the potential to keep on growing, then how much is the Tunnel worth. My just for laughs number of a maximum of $30 million might not be so bad after all.

That means $15 Million each for Windsor and Detroit. Hardly the earth-shattering deal is it after all but one that has occupied our Mayor's time to the detriment of the important issues facing Windsor!