Thoughts and Opinions On Today's Important Issues

Thursday, April 03, 2008

The Tunnel Deal

I'm sure that you're wondering what the Tunnel deal is going to be with Detroit in the end.

I have no idea if anybody really knows what is going on but here are some elements of what has to take place.

Somehow the City of Detroit has to collect a net amount around US$60 million because that amount of money is needed to plug the financial hole in their Budget. That is the amount that the Detroit Mayor has told the Council that he expects to receive. I do not see them accepting less but I certainly do expect that Council may demand more if they don't like Kwame's deal.

The City of Windsor needs to find somewhere US$75 million if it is going to do the deal with Detroit. Unless there is a giant slush fund somewhere within the City, and that would cause a huge outcry, the City is going to have to find someone to finance this transaction.

The City will not be able to play games as they did with respect to the University Engineering Complex and Jobs Today by pretending to offer money but in reality nothing would be offered until after 2010. Real cash has to be produced now.

My recollection is that the deal was supposed to be completed in June of last year and in fact the deal is priced as at June, 2007. Why wasn't it done then? Why the delay? I wonder if it had something to do with the meltdown in the subprime mortgage market and private funds drying up such that the transaction could not be completed as originally structured.

If that is the case, then this deal might not get done for quite some time. But I have a sneaking suspicion that the transaction may have changed. We do know that Kwame told his Council that there was a potential new structure. In fact the irony of ironies would be if Borealis was the financing source even though Borealis seemed to have been rejected once before. The OMERS head was at Dwight's Rotary lunch along with 2 others on Monday. The three of them did not come to Windsor for the food.

I have no idea if Borealis is involved or not but the fun part would be that Eddie Francis may well be undertaking the transaction that Mike Hurst proposed when he was Mayor in 2001. The irony would be that Hurst is dealing with Eddie first and that he is helping to make Eddie successful but that Hurst is now the lender rather than the borrower.

What will the transaction be... I may as well quote the Windsor Star in 2001:
  • "Tunnel deal aims at cash; Talks under way may help reduce debt, stave off tax hike;
    Windsor Star 03-21-2001, By: Roseann Danese Star Municipal Affairs Reporter

    Windsor ratepayers may avoid a tax increase if the city is able to reach a deal with the Windsor-Detroit Tunnel operator for millions in "hard, cold cash."

    "Exploratory" discussions have begun with Macquarie North America Ltd. as the city considers entering into a deal that could be worth more than $36 million US by giving the company a bigger chunk of tunnel operations.

    "What do you do to meet the needs?" Mayor Mike Hurst asked.

    "I think it's at least worthwhile to look at some of your assets in determining whether or not you can strike an arrangement by which you can convert some of the asset into hard, cold cash."

    The tunnel itself would not be sold, Hurst said. The discussions will focus on selling more tunnel operations and the right to operate it beyond the current Joint Operating Agreement (JOA), which expires in 2007.

    "If this works out, we will be giving to a private sector company the right to operate the business for a period of time in exchange for a significant, up-front sum of money," Hurst said, adding that the company would make its money back on the tolls...

    The plan, described as a long-term debt funding strategy, is similar to what the city hoped to do when the province opened the energy market to competition. Windsor had planned to borrow against the assets of Enwin Utilities and use some of that money to increase the city's roads and sewers budget, retire the city's short-term debt and place the rest in reserves.

    That plan has been put on hold while the province vacillates on the concept of an open energy market...

    The fact the tunnel is such a large revenue-producer for the city will have to "be taken into consideration in any discussions," Hurst said. It will have a bearing on how much the city can ask from Macquarie.

    The plan is a creative attempt to adapt to the costs passed down by the province, Hurst said.

    "People are saying they don't want their taxes increased. We're trying to put in place a mechanism through which we can in fact significantly increase the level of dollars available for capital projects -- roads and sewers -- without having to significantly increase taxes to the taxpayer of the city of Windsor."

The story was a bit confused since it almost looked like a long term P3 lease deal at one time ie "sell some tunnel operations" or "giving to a private sector company the right to operate the business for a period of time in exchange for a significant, up-front sum of money" and then just a borrowing at another.

I guess my speculation with respect to the Windsor Utilities Commission and/or Enwin and the Tunnel may not be that far off the mark. However, my suspicion is that a P3 deal is probably not possible in a timely fashion these days with equity markets the way they are but that borrowing based on a mortgage on the Tunnel or Tunnel revenues might work.

As I speculated before, this idea is not new in this deal:
  • "I know you think I am just being foolish but I'm not. It wouldn't surprise me if, as part of the Detroit/Windsor Tunnel deal, the two City Governments were not made aware of what happened with the toll road in Chicago and the Indiana Turnpike by their financial advisers.

    Just taking a look at Chicago, since that City's Mayor is a hero of our Mayor. They received $1.8 billion when they leased their toll road, a sum considerably greater than they ever expected to receive. That kind of money has to brighten the eyes of any Mayor in any city.

    That upfront P3 money could be used to pay down debt, reduce taxes in future years, be set aside for special projects, used for reserves and so on. My guess is that it would burn a hole in someone's pocket in Windsor and we could squander it building shovel ready lands at the airport for developers at taxpayer expense."

The Tunnel was supposedly valued at $111 million in the City rollover deal. Let's assume that one hundred million dollars could be borrowed against the Tunnel assets. In other words, the new Tunnel Corporation would borrow from a lender $100 million and then pay it back over time, probably on a non-recourse basis, from Tunnel revenues only. That would be one way to protect the City provided that the City also did not have the guarantee the Tunnel Corp.'s debts.

What would the Tunnel Corp. do with that money... the first thing obviously is to pay to Detroit US $75 million and then take over the operation of the Detroit side of the Tunnel for a number of years. (Let's forget about Alinda for the next dozen years since that complicates the matter). Windsor would then have control of the full Tunnel. As for the balance of the $100 million, the Tunnel Corp. could use it or perhaps declare a dividend and pass that money to the City which would then squander it.

I probably should not be so cynical and probably should suggest that we should congratulate the Mayor for using the asset to gain $25 million that could be used for City purposes. After all, that is what Mayor Daley did in Chicago and Eddie looks very highly on the Mayor. The only difference is Daley got almost $1.8 billion for his asset.

I certainly know what the cheerleaders and sycophants will say about the genius of the deal, forgetting that it really was one that Mike Hurst thought about first . I also want to say that this is a typical Eddie Francis transaction in which he cannot act it seems until it is too late thereby costing the City money.

What do I mean by that? As I posted in one of my blogs previously, the Mayor valued the Tunnel at between $2-$300,000,000. I assume that this was the Canadian side only from what he had said. If that is the case, the delay has cost the City $100-$200,000,000 in valuation.

But it gets even worse. Had the deal been done in June, 2007, perhaps the Tunnel was worth what the rollover amount is stated to be. I sure hope that Eddie locked in amounts with the lenders at that time because, frankly, I think the Tunnel is worth much less today. Why do I say that? It is very simple.

As I have posted previously, US DRIC came out with their Environmental Impact Statement a few weeks ago. In that report, it was said that the new DRIC bridge would take away traffic from the Tunnel. How much traffic...The City of Windsor owned Detroit/Windsor Tunnel could lose up to 26% of its total traffic! That's represents perhaps about $25 million, a quarter of the valuation on a pro rata basis, or the amount of money that would have come to the the City of Windsor if the deal was concluded. It may be that the only winner in this transaction is Detroit if they get their $75 million out of the first!

Obviously, if the money is borrowed, it has to be paid back. If you figure a $100 million loan at say 7% for 75 years, the annual payment of principal and interest would be about $6 million. Considering that the Tunnel volume is around 5 million vehicles both ways, it would mean that the toll have would have to increase by about one or two dollars per vehicle, payable only by the vehicles that enter on the Canadian side while Alinda is still around for a dozen years. How could the Tunnel stay in business at that kind of the toll rate comapred with the Bridge toll that is less now?

Even if it is a P3 deal with money being paid up front and someone operating be Tunnel for 75 years, they would have to increase the tolls as well to cover their upfront payment.

Hard to see how it can work but who knows.

The interesting issue to me now is who is chasing those dollars for the Tunnel investment and what will the size of the commission be IF money can be found. What conditions will be imposed on the loan and will taxpayers ever see the documents or will we have to do what Chris Schnurr and the Star had to do to see the Spits' contract.

Does it seem like this to you as it does to me? Everything that the Mayor touches seems to disintegrate. Does anyone know what the opposite of the Midas touch is called?