Thoughts and Opinions On Today's Important Issues

Monday, April 21, 2008

Feds To Salvage Tunnel Deal

It is very pressure packed to write a BLOG if you take your work seriously as I do. I would suggest that you try and write one or two BLOGs a day for a week and tell me that I'm wrong.

To relieve the stress, sometimes I will play chess against my computer. It allows me to escape for awhile and recharge the batteries. I was playing a game and of course lost badly. I'm not a very good player. Whoever the software developer was has a unique sense of humour because he likes to rub it in your face when the program beats you. Every time one loses, the program says that you have been defeated by the [INSERT NAME] gambit since chess moves always seem to have names. But quirk of fate, the gambit that defeated me this time around was called the Ambassador Gambit.

Then it hit me, I was so dumb. Another Eureka moment!

I finally figured out what the Tunnel deal was all about. The Federal Government of Canada always had to have control over the Tunnel if they were going to be successful with the DRIC bridge (or rather the Ambassador Bridge that they always intended to get control over.)

It was always the intention in my opinion of the Government to have a P3 deal for the construction of a new bridge. They were not going to finance it.

Private investors are effectively monopolists. They want to ensure that they their return on investment is virtually guaranteed and want no competition that might challenge that. That is why terms in agreements limit what Governments can do, if toll roads are involved as an example, in creating free roads nearby. The Tunnel is competion for traffic and that is a NO-NO to investors.

Obviously, as we can see from the US DRIC report and the traffic surveys that Transport Canada are doing, we need to entice investors into investing into the crossing. Why would an investor do so, especially since car traffic is involved, if the Tunnel could be a competitor? That had to be controlled.

Now the Canadian Federal Government has a number of brilliant thinkers whose sole function in life is to plot strategy. They really don't do any work but get a very big salary. They are called Deputy Ministers. I can just imagine a bunch of these people sitting around a table about a decade ago trying to figure out what to do with the Windsor crossing.

They make plan moves and count-moves using the most up-to-date decision-making software available and using some of the most powerful computers on the planet. Their actions are taken with military precision as if they are fighting a war. Because quite often their opponents are very powerful.

It is very clear to me is as I have Blogged before that the Government always planned to squeeze out of business the Ambassador Bridge Company, or at least pretend to do so, to force the Owner to sell out to them cheaply. Their prime choice for a new crossing, as in Sarnia, was always beside the existing bridge. The name of that exercise clearly has to be the "Ambassador Bridge Gambit."

However, they needed a way to get control of the Tunnel. That Gambit was probably called the "Ambassador Bridge Jr." Gambit. In those moves, the Mayor of Windsor, and it really didn't matter who it was, was a tool either wittingly or unwittingly. The Federal Government could not in the first instance takeover the Tunnel because Americans would go furious since the Border Crossing would be under total Canadian control. Therefore, the Mayor of Windsor was used since the Mayors in Windsor always wanted to be border operators with the City's ownership of the Tunnel. It played to their egos.

Things got desperate however because even with the best laid plans, sometimes reality has a way to bite. That is what gave away the plans of the Federal Government that took me so long to figure out. The Bridge Company's Owner's plan to operate the Tunnel for the City of Detroit almost ruined everything. In hindsight, it is now very clear why the heavies from the Canadian Government came down to Detroit to speak with the Detroit Mayor to kill the deal. They had to keep the Bridge Company away from the Tunnel also or no private investor would want to invest in their new bridge, regardless of location.

It meant then advancing the plan and that is where the Mayor of Windsor came in. The Mayor's ego was played by telling him that he could control the entire Tunnel and that the Feds would be there to finance it. Knowing of the desperate financial shape of the City of Detroit, it would not be too difficult for the Mayor to negotiate a transaction with the Detroit Mayor at whatever price since it did not matter. The Feds were never going to do the deal at the price since it was too "high" as we saw subsequently but wanted to lock the Detroit Mayor into a deal.

You may ask than why wasn't the deal completed. What a silly question! If the Federal Government was not going to pay full value for the Ambassador Bridge why would they do so for the Tunnel? The object of the exercise is to squeeze the owner so that the price goes as low as possible. Do you really think that the DRIC extravaganza, even if it cost $60 million in consultants' fees, is not worth the price if it scares the Bridge Company Owner into selling his Bridge at less than it is worth. Please, we are dealing with high finance here not Monopoly money.

Without going through all the machinations, because it's too boring to discuss, where are we now? The City of the Detroit has a huge budget hole that only the Tunnel deal can fix right now. The Detroit Mayor and Council are fighting over it and it is making the headlines almost daily. The Windsor Mayor has been used as their front to negotiate the transaction and to negotiate a price that is worth far more than the Tunnel is worth. Why would that be done... to scare off any potential private investor.

Who is left now on both sides of the border... the Province of Ontario. And with Ontario's financial troubles, do you really think that Ontario can afford to do this deal. Politically, it would be suicide with all of the regions of Ontario demanding the heads of the Minister of Finance and the Premier for spending all this money that will go to the City of Detroit. Once they turn the deal down, then Detroit and Windsor are stuck aren't they? Who will invest now? And Windsor's Mayor, he has spent over million dollars in legal fees for which he would be crucified if there was no successful deal.

All of the comments in the newspaper about going to the Province are grist for the mill. The Deputy Ministers must be laughing themselves silly since all that is happening is that investors are being turned off on this transaction. The Province would not dare finance it because then the Federal Government would turn around and say that the Province is so wealthy they do not need Federal money for infrastructure.

It is checkmate for the Mandarins!

Watch now as the Federal Government comes back to the Mayor of Windsor, because they still need him as a front so that the United States Federal Government will not get upset, and will now help him finance the Tunnel deal.

However, the price will be significantly less. It will not be as low as that of the Bridge Company because that could give rise to a lawsuit by that Company and anyway, it will be buried in the New bridge project just like the DRIC costs. It's called "Soft Costs" isn't it?
  • "The soft costs are the costs that you cannot visibly see. Soft costs include the architect's fees, the engineering reports and fees, the appraisal fee, the toxic report fee, any government fees - including the plan check fee, the cost of the building permit, any assessments, and any sewer and water hook-up fees - plus the financial costs, such as construction period interest and loan fees."

My guess, is that the final amount of the deal for the Detroit side with probably a similar amount for the Canadian side will be somewhere between what the Bridge Company offered and the rollover price for the Canadian side less a discount for the car volumes that the new Bridge would take away from the Tunnel and for 12 years of Alinda involvement in Detroit. Let's estimate in the range $40-$50M.

Oh there will be all kinds of bashing and names calling but just you watch how the Mayors and Councils on both sides of the border rationalize the transaction to make themselves look like heroes to their population. Windsor will probably get a "bonus" if the deal goes through for a job well done. Payment for the Tunnel Plaza Inprovements. Some money, after all, is better than no money.

Taxpayers won't get stuck either. Here's the real genius. The new bridge and Tunnel will all be wrapped up for one private P3 investor to manage. Now that's building a Government monopoly isn't it!

I have enough trouble with software chess games. Imagine trying to beat the bureaucrats! Now we know for whom the Tunnel tolls. It tolls for them