Wanna Buy A Tunnel

Perhaps Derrick Miller in his new career with his Citivest Capital Partners hat will be able to get this deal done finally. After all, their website says that they assist in P3s, the latest buzzword for government financings. Who knows, maybe he will help MDOT with the DRIC bridge too if it ever gets built.

I hope the Detroit/Windsor Tunnel deal happens quickly for Kwame so he can balance his budget and reduce debt.

For Windsor taxpayers, I can only pray that the US$75M deal never gets done unless our Mayor immediately flips it to someone who thinks they can make some money on it before Windsorites get stuck with a lemon.

If OMERS or some other pension fund buys into it, or it becomes part of an offering to individuals as part of an infrastructure mutual fund, well read the second story to discover that infrastructure may be sexy but not risk-free

And for those who think someone would finance the Greenlink road by tolls, or can finance a new DRIC bridge in a P3, well read on about a tunnel in Sydney, Australia. A new bridge here with the volumes not increasing dramatically as DRIC suggested would either be subsidized heavily by taxpayers or go broke since its tolls would be so much higher or could bankrupt the Ambassador Bridge, Detroit Tunnel and Blue Water Bridge since there is not enough volume for all of the crossings. Then what?

• "Sixteen months after opening Sydney's Cross City Tunnel is in bankruptcy. With traffic of 30k/day - about a third of the 89k projected at financing."

I hope that DRIC did not use the people who did the traffic projections for that project. You know already that DRIC has had to revise its projections downward several times already. In Sydney, it was claimed that

• "...the bankruptcy which was due to highly erroneous traffic and revenue forecasts."
  
  "However the business plan on which the initial concession was based used botched traffic and revenue studies suggesting a fantastic 90k veh/day by the end of the first year. (The Holland Tunnel in New York City after 80 years has reached that volume and it taps the New Jersey Turnpike at one end and lower Manhattan at the other!)
  
  35k veh/day taps a substantial proportion of the traffic that used to travel on William Street the 6 lane surface signalized arterial above that was previously the main drag to the east. Traffic forecasters assumed quite wrongly, it turns out, that the tunnel would attract traffic from parallel routes miles on either side of William Street."
  
  The tunnel was eventually bought for A$590M resulting in a massive loss.

Fire sale as tunnel price plummets
Danny John, Vanda Carson and Jordan Baker
February 8, 2007

THE Cross City Tunnel, which cost more than $900 million to build, is now worth little more than a third of that, based on documents obtained by the Herald.

Files lodged with the Australian Securities and Investments Commission show that three big Australian banks are owed $110 million by the tunnel's owners. About $460 million is also owed to foreign banks.

The documents also show that despite assurances from the State Government, taxpayers have been left out of pocket.

They show that dozens of organisations, from a cycling club to the Tax Office, became victims of the financial collapse.

A list of unsecured creditors - traditionally the last to recoup money - shows they were owed a total of almost $300,000, including about $100,000 to state and federal agencies.

The commission list was dated December 27, when CrossCity Motorway went into receivership. On the same day the Roads Minister, Eric Roozendaal, said there was no financial risk to taxpayers.

The documents, compiled by receivers KordaMentha, show that local superannuation funds are owed nearly $115 million in unsecured loans to the State Government, and the Tax Office is facing unpaid bills of tens of thousands of dollars.

Among the unsecured creditors were staff, whose unpaid wages amounted to $22,668 and holiday pay added up to $105,498.

KordaMentha, appointed by the banks to sell the tunnel for the highest sum possible to cut their likely losses, believes it will have found a buyer by June.

But KordaMentha has deliberately withheld figures on what it thinks it is worth, because it does not want potential buyers to know what they could pay for it in a fire sale.

The receivers are also unsure of how much they will raise when they finish unwinding the operations and finances of the five companies that separately own the tunnel, the equipment and plant, and the way it was financed.

One company, CrossCity Motorway Nominees number 2, is owed $223 million by one of its sister firms, while the CrossCity Motorway property trust owes $332 million to Nominee company number 1.

The banks and creditors are likely to pursue cross-claims against the various entities as they try to claw back what they are owed.

Among the claimants hoping to recover money are Hong Kong-based Cheong Kong Infrastructure, one of the original investors in the tunnel, which has lodged a claim for $58.5 million. CKI has been joined by fellow shareholder Bilfinger Berger, which is seeking $23.4 million, and four superannuation funds, which seek a total of $31 million.

But as unsecured creditors they stand to lose every cent unless the receiver recoups more than $570 million, having paid off the banks first.

Industry sources estimate that a toll road operator, the most likely buyer, will pay only around $350 million for the tunnel.

That price would leave the banks, led by Westpac, which is owed $46 million, facing losses of $220 million. The rest of the creditors would get nothing.

That would almost certainly prompt KordaMentha, under pressure from the banks, to launch a court action for damages against the NSW Government over the reversal of the road closures which finally tipped the tunnel into receivership.

The former tunnel chief executive, Graham Mulligan, who is employed by the receivers, recently estimated that any such claim could amount to as much as $100 million.

MONEY PIT

$900m The cost of building the tunnel.

$350m Estimated sale value.

$570m What the banks are owed.

$220m Likely loss for the banks.

$100m The looming court claims.

97,000 Original daily traffic estimate.

30,000 The current daily traffic flow.


The tunnel's mounting toll

THE more we learn about the Cross City Tunnel debacle, the more ominous it sounds. The latest statement from the project's receivers mocks the Iemma Government's repeated assurances that the cost of the collapse will not be borne by the taxpayers of NSW.

The tunnel cost about $900 million - about $330 million came from shareholders and $570 million was in secured bank loans. The tunnel's sorry performance means the shareholders have lost their money. The banks will share whatever the receivers can now get for the tunnel, which is likely to be a couple of hundred million dollars less than the banks are owed. That will force the receivers to look elsewhere to make up the shortfall. And the first avenue they are likely to look is at legal action against the Iemma Government for breaching its contract by reopening roads around the tunnel. Damages won by the receivers would come from taxpayers' pockets.

But do not expect any apologies from the Premier, Morris Iemma, or his cohorts for this grim prospect. What do they care about your money? Look at how they dismissed the $60 million lost on the tunnel project by the State Super Corporation, one of the tunnel's shareholders. The state's Finance Minister, John Della Bosca, had the gall to say this was not a loss for the fund's members. Of course, it was - and the fact that it might be offset by gains on State Super's other investments does not make it any less so. Of course, the biggest cost is to the reputation of NSW as a place to do business. By breaching its contract with the tunnel operators, the Iemma Government ensured that those writing contracts with NSW will in future include a premium to cover the risk of dealing with a government that might welsh on a deal. One way or another, that premium will be paid by the people of NSW.

The immediate worry, though, is the prospect of that lawsuit. The Government may yet have to head off legal action by buying the tunnel - despite its frequent protestations that it is not interested. To placate the receivers, the price would have to be close to the $570 million owing the banks. Whatever the price, you can be sure the Iemma Government would tout it as a grand deal for the taxpayers of NSW.