Thoughts and Opinions On Today's Important Issues

Thursday, February 28, 2008

Leveraging The Tunnel

I have speculated for a very long time that the purpose behind the Bureaucrats’ action with respect to DRIC is to force the Ambassador Bridge owner to sell out at a cheap price. Unfortunately for them, they miscalculated as they finally must have understood when they saw the 2 1/2 page Globe and Mail article some time ago.

I had this wild idea after reading a number of articles recently about the Tunnel. Are the Feds trying to do the same thing with the Detroit/Windsor Tunnel to end the City’s ownership of it but using different tactics? In other words, do you think that the Feds are using Eddie now to buy out Kwame and then to force him to sell Windsor’s interest in the joint Tunnel to them? Is he a participant in this Federal scheme, willing or not, to try to salvage anything on the Tunnel?

The Tunnel itself is a declining asset that will require capital improvements if the latest story out of the Windsor Budget talks is correct. How much money is needed is not clear but the Tunnel Ventilation Building cost a fortune. It looks like both the Tunnel Improvement Project in which the City has to fork over $10M and the Tunnel deal with Detroit are in trouble. As I Blogged before, the City Budget has no money for the Improvements for years even though the City is committed to spend the money when Eddie signed the Agreement with the Senior Levels!

I had read recently in the Detroit newspapers about the problems that Windsor is having completing the Tunnel transaction in Detroit. The Detroit News reported:
  • “The one-time tunnel deal with Windsor, which the mayor has been counting on to eliminate the city's deficit, was stymied because Windsor was having a hard time getting the cash from conventional sources. Windsor hopes to get the money from its provincial government. It's unclear how large the deficit is, but when Kilpatrick announced the plan in 2007, he hoped it would raise about $75 million.

    Councilwoman Sheila Cockrel hammered the mayor on a timeline and more specifics. "What are we agreeing to? Who are the players?" she asked.”

And this one:

  • “Kilpatrick talked about having a balanced city budget, which would only happen if Windsor can agree on a roughly $75 million deal with the city to take over its share of the Detroit-Windsor Tunnel. That plan that has been stalled for nearly a year as Windsor tries to find the money. "

Kwame needs a deal or else Detroit is in more financial trouble. Eddie needs a deal or he fails again to accomplish a goal. Moreover, an interesting question to ask is whether the City is in breach of its Agreement if the City Budget has said that the City will NOT pay out now its share of the Improvement costs. That is all Eddie needs…the Senior Levels walking out.

Ultimately, if Eddie does anything with the Tunnel or is forced into doing something, (probably for financial reasons since the City will no longer be able to afford it), it is my opinion that Canada’s Federal Government will be the main participant. However the price is going to be a lot less than our Mayor hoped for. It would be a good deal for the Feds since the price of both sides of the Tunnel has probably dropped like a rock given the needs of the 2 Mayors.

I do not think that anyone including the Feds has a big interest in the Tunnel any longer. I suspect that the Feds have an interest in ensuring that they have control of the Tunnel in the same way that they want to have control over the bridge to the United States and other border crossings across Canada. They also need it to kepp prices up for a P3 operator of a new crossing. Can't have low prices at the Tunnel to keep business from the DRIC bridge can we.

They played Eddie like a fiddle ever since the Bridge Co. deal for the Tunnel was over so that now he is desperate for a deal, any deal! The only question now is when will the Feds take Eddie out of his misery and pay him some money.

I doubt that the Province has the money to invest in a border crossing as Kwame suggested and probably would be criticized severely if it chose to do so. I hardly think that the Detroit/Windsor Tunnel is something that the Province needs to be involved in and in any event would have to get approval from the Federal Government under Bill C-3.

The Feds have been involved before and were expected to be the Mayor’s financing source. However that fell apart. Was that deliberate on the part of the Feds? Did that put Eddie in a real jam since they were his final back-stop if private investors turned him down?

We were told at a Council meeting that there were negotiations going on with respect to the Tunnel Plaza Improvements and I speculated at that time that they were money issues involved as well.

Now Eddie learns that the DRIC project will take away 26% of his traffic. That should certainly impact the revenues in a negative way at the same time that the City’s budget says that the dividend has to be slashed because there were capital projects that needed funding.

The Feds must understand very well because of their due diligence what the traffic is, the condition of the Tunnel, its value, and what is happening to it from a market share perspective. It is a declining asset that very few private investors would be interested in other than perhaps Alinda who is involved on the Detroit side but who I am sure would rather just be manager.

Did it make sense for Eddie to try and do a financial deal on the Tunnel? That gets into the whole argument about should there be P3 transactions involving public assets. For the sake of this BLOG, let’s make the assumption that substantial sums of money could be brought in to the City’s revenues by leasing it out so that it would be beneficial to taxpayers.

At one time I expect that the Tunnel, especially if Windsor could have purchased the interest of Detroit at a good price, could have had some real value. However, under the management of our Mayor as the Chair of the Windsor Tunnel Commission the value has dropped significantly. As I wrote before when dealing with the US $75 million deal that Eddie proposed:

  • "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!"

I’m sure that you remember the Bridge Company’s number for the value of the Tunnel which seemed so low but which looks remarkably accurate when looking at the Tunnel today.

In yesterday’s paper it was stated that the Tunnel dividend was slashed to zero dollars due to traffic declines. Yet in December I saw the following:

  • “Neal Belitsky, a spokesman for the Detroit & Canada Tunnel Corp., declined to release the raw numbers but said "traffic from Canada to the U.S. has increased since late August when the Canadian dollar first started strengthening.

    "But overall traffic has remained steady because the number of same-day trips from the U.S. to Canada has dropped," said Belitsky. "And these are generally round trips anyway, so the numbers tend to remain fairly consistent overall but might fluctuate in one direction or the other for various reasons."

The dividend has been cut rather dramatically as well. At the Joint Councils meeting in Detroit a few years ago the dividend was said to be $6.6M. It was then cut to about a million dollars a year I believe and now it is ZERO. Yet I had written a month ago:

  • “In passing, in going through the documentation even more, I saw the following which confirms to me how poorly the Tunnel has been managed:
    "Tunnel Dividend - Due to Reduced Cross-Border Traffic 1,000,000."

Does anybody know what is really going on at the Tunnel because I’m very confused about it?

The Federal Government is in a very strong position right now and is probably the only one who is interested in the Tunnel. Did the Mayor’s fear of acting ultimately do him in and us too as we may only see a fraction of what the Tunnel was worth only a few years ago?

Does Eddie have any leverage against them that he can use to try to build up the numbers for his failed Tunnel deal. Only one thing that I can see right now. Continue to harass the Bridge Co: more Interim Control By-law, demolition by-law, no closing of Huron Church, the upcoming heritage designation and so on.

Perhaps that might make the Bureaucrats more friendly if he helps them on the DRIC bridge and earn the Mayor a reward!

I told you my idea was wild!