Thoughts and Opinions On Today's Important Issues

Wednesday, April 02, 2008

CliffSuttsnotes: Our Tunnel Study Guide

American readers of this BLOG know what Cliffsnotes are. We have the equivalent in Canada called Coles Notes. There is an interesting history between these two series but I will let you look that up for yourself.

In case you do not know, these Notes are used by students to help them in various subjects. In my days, they were used primarily with the various Shakespearean plays to help people understand them.

They are study guides designed to "save study time... to get the most out of your busy schedule." It is said that "You should use them as starting points to open yourself to new methods of encountering, understanding, and appreciating."

We are very fortunate in Windsor that we have a study guide to help us on the Tunnel deal with Detroit. That Tunnel deal is so complicated that it would be almost impossible for any poor Windsorite to understand it. After all, our outside law firm has been working around the clock on this transaction for months and months and months. And they are still not finished with that, needing another 60 days to complete some surveys.

We have a variation of those study guides in Windsor called CliffSuttsnotes. They help explain to us what this transaction is all about. In case you did not know, Cliff Sutts is the outside lawyer retained by the City to assist in this transaction. He has been speaking with the media recently and he has given us a very good indication of what is going to happen with the Tunnel deal.

Going back in history, Mr. Sutts has effectively told us that the City will not be at risk in this transaction. That is a pretty nice guarantee that Mr. Sutts and his firm are providing to us.
  • "the deal will not be completed until he is fully assured local taxpayers will not be hurt.

    “We will be extraordinarily cautious so costs of the acquisition will be self-supporting of the project itself. That there will be no need to go to the well of the city to support this transaction."

Whew, absolutely no risk to taxpayers or City assets ever. The Mayor and Mr. Sutts repeated in the last couple of days this assurance by saying:

  • "But Sutts and Francis said Tuesday they are being careful not to complete any tunnel deal that could prove costly in the years to come."

Nice to have Eddie personally on the hook as well. Especially if he is no longer Mayor "in the years to come." We do not want his successor burdened do we by a bad deal.

But what is the nature of the transaction that we are going through respecting the flip of the Tunnel to a subsidiary. Again thanks to the CliffSuttsnotes study guide, we can cut through all of this stuff. According to Mr. Sutts:

  • "the move allows the city and the new corporation to arrange financing independently of each other. However, any sale of tunnel assets would require the approval of the City of Windsor -- the corporation's sole shareholder."

It is very interesting to note that the CliffSuttsnotes only talked about a "sale" requiring City approval but not about a financing or a mortgage or a P3 deal. Why did Mr. Sutts not mention them too? He must mean then that the Tunnel Company could do those kind of things independently of the City as a separate legal entity. Hmmmm if there is a blame to go around eventually on this transaction, is that the reason why Windsor Tunnel Commissioners were made part of the new Tunnel Company?

However, I am confused about one thing that I hope the CliffSuttsnotes will clarify. In the Free Press, we read:

  • "Kilpatrick and Cockrel...discussed Kilpatrick's proposed economic stimulus package, the proposed leasing to Windsor of Detroit's half of the Detroit-Windsor Tunnel and the city's budget, according to the statement."

Yet our Mayor said

  • "the discussions aren't about Windsor trying to gain control of both sides of the tunnel.

    "The city's efforts are to ensure that the border continues to remain in public hands, and that the two (sides) continue to operate as one entity,"

We do know that the Mayor of Detroit presented to his Council a new structure of a deal but we do not know what it is.

If Eddie is correct, then it does not seem as if there will be a lease transaction but something more along the lines of a Joint Operating Agreement with Windsor perhaps being the operating party.

What may be happening is a transaction whereby Alinda is either bought out or allowed to operate until their contract ends in Detroit and then Windsor takes over. It appears that Alinda's agreement has been extended but may be terminated on 90 days notice in Windsor.

It would seem to me that what is proposed to happen is some kind of a financing---a mortgage on the Tunnel or a loan secured by the Tunnel assets or the toll revenue stream--- whereby Detroit gets the first $75 million of the deal and Windsor in effect takes its position for the next 75 years and Windsor gets the balance of whatever is left over from the financing. That allows Windsor to deal with the whole Tunnel.

The key question is who in their right mind would finance a declining asset like the Tunnel that no longer pays a dividend, has been losing market share and is also a unique security risk. Is that the reason for the 60 day delay, to find a financier? I did not see anything in the CliffSuttsnotes about that part of the deal.

Here's the real kicker as I have said. The Tunnel will lose a chunk of its business, about 25%, if the new DRIC bridge is built according to the US DRIC consultants. Now the Ambassador Bridge is to lose some of its bridge business to the new DRIC bridge as well so what business will they go after... the Tunnel business. That should cost the Tunnel even more volume.

Good thing that the Tunnel valuation in the CliffSuttsnotes study guide was said to have been determined in June, 2007 rather than February, 2008 or the valuation would have had to drop considerably and the CliffSuttsnotes revised.

No wonder there are problems raising funds from any private equity investor these days with money drying up. Is that why the OMERS people and Dwight were in town, to talk to Eddie!

The situation that we can get into is that the City could lose the Tunnel. I assume that the Tunnel deal will apply to the new Tunnel Corp. only without any kind of a Guarantee from the City. Let us assume that the transaction results in a financing today of a hundred million dollars. That would mean an additional toll fee of about a dollar a vehicle just to cover repayment for the next 75 years based on last year's Tunnel volumes. Let us also assume that the US DRIC projections are correct in that the Tunnel loses market share. How then does the Tunnel Corporation pay back the loan? It will be extremely difficult when market share drops like a rock. If tolls are raised too high, the Bridge gets the vehicles.

Whoever then is the financing party may have the great pleasure of taking over an old Tunnel that may require millions of dollars of improvements if there is a foreclosure. Assuming that the party is that foolish, then the City may lose the asset and all we have done is help out Detroit's budget while ruining our balance sheet. And it could impact tourist traffic negatively too. Makes a lot of sense doesn't it.

A couple of other thoughts.

I think that Cliff Sutts is a smart lawyer as far as his client is concerned. One day I remember meeting a consultant when I worked for one of the auto companies in town. I commented on the fact that the consultant hired a Rent-A-Car that happened to be the same brand that my employer manufactured. He just smiled and said, "What else did you expect from me. I know who my client is."

It is obvious therefore that in his negotiating with the City of Detroit that Mr. Sutts only uses the Tunnel when he goes across the border and that he is totally unfamiliar with the Ambassador Bridge. If he had any familiarity with the bridge, one would ask how he could make the following comment:
  • "With 4,000 Canadian commuters travelling to Detroit daily, keeping the tunnel in public control is of greater importance to Windsor, Sutts said.

    "It's important tolls are reasonable. Private enterprise would jam it up as high as possible," Sutts said."

Obviously, Mr. Sutts does not seem to know that the round-trip toll at the Cities-owned Tunnel is higher than that at the privately owned Ambassador Bridge. That was a mistake that Brian Masse seemed to be making on numerous occasions until this BLOG corrected him. I hope now that Mr. Sutts will not make this error again. Perhaps he should use the Bridge on occasion in order to gain competitive information.

The other point that I thought was interesting is that I assume that Mr. Sutts is charging a fee to the City for his services that is bordering on pro bono! After all he was the one who talked about private enterprise jamming up their charges as high as possible. Clearly, he only wants to charge "reasonable" fees.

I remember that Mayor Hurst had said in the MFP file when discussing his fees:
  • "I think what we had to do was to get the best in the business involved and getting the best in the business is going to cost you big bucks," Hurst said. "

I know Mr. Sutts is good but "Big bucks." Come on now. With Eddie, I am sure that we got the best in the business without taxpayers being jammed. I read that in my CliffSuttsnotes.